The Government has published guidance on the potential VAT implications of a no deal Brexit on cross-border supplies of goods and services.
On 23 August 2018, the Government released a number of technical papers concerning the implications of an “unlikely” no-deal exit from the EU on 29 March 2019. These papers are part of a series of technical notices issued by the Government setting out information on preparations for a ‘no deal’ exit. Two of these papers were issued by HMRC, one of which, "VAT for businesses if there’s no Brexit deal", covers the VAT implications of cross-border trade in goods and services post a no deal Brexit.
Supplies of goods
In broad terms, the guidance confirms that the EU would become a “third country” for VAT purposes, with the VAT rules which currently apply to supplies of goods to and from third countries generally applying to supplies to and from the EU post Brexit. However, the Government recognises that dealing with import VAT from EU imports will create an additional burden and so has indicated that it would introduce postponed accounting for import VAT on goods brought into the UK, whether from the EU or elsewhere. This means that UK VAT registered businesses importing goods to the UK would be able to account for import VAT on their VAT return, rather than paying import VAT on or soon after the time that the goods arrive at the UK border.
In relation to imports of goods as parcels sent from overseas, the note confirms that if the UK leaves the EU without an agreement then low value consignment relief (LVCR) will no longer apply to any parcels arriving in the UK, such that all goods entering the UK as parcels sent by overseas businesses will be liable for VAT (unless they are, for example, zero-rated). For parcels valued up to £135, a technology-based solution will be adopted to allow VAT to be collected from the overseas business selling the goods into the UK. Overseas businesses will charge VAT at the point of purchase and will be expected to register with an HMRC digital service and account for VAT due.
The paper recognises that, for UK businesses exporting goods to EU customers, whilst such businesses will be able to zero-rate their supplies, import VAT and customs processes are likely to apply on entry to the EU.
Supplies of services
Again, the main consequence of a no deal Brexit is that the EU would become a “third country” and the rules for the place of supply of services will generally apply as if supplies of services to an EU customer were to a third country customer.
The guidance does not that there will be some types of service that will be affected by potential changes, however. In particular:
- For UK businesses supplying digital services to non-business customers in the EU, the ‘place of supply’ will continue to be where the customer resides. VAT on services will be due in the EU Member State in which the customer is a resident.
- As regards supplies of insurance and financial services, the guidance notes that changes may be made to the input VAT deduction rules for such services supplied to the EU. Under current rules, input VAT on supplies of such services to EU customers is not deductible, whereas input VAT on such services supplied into non-EU customers is deductible. Whilst it would be sensible to treat supplies to EU customers in the same way as supplies to non-EU customers post-Brexit, the Government may well have concerns over the cost to the Exchequer of such a change.
- VAT Mini One Stop Shop (MOSS): the guidance explains that if the UK leaves the EU without an agreement, businesses that sell digital services to consumers in the EU and that want to continue to use the MOSS system will need to register for the VAT MOSS non-Union scheme in an EU Member State.
If the UK leaves the EU without an agreement, then UK businesses will continue to be able to claim refunds of VAT from EU Member States but in future they will need to use the existing processes for non-EU businesses. This process varies across the EU and businesses will need to use processes in the individual countries where they incur costs and want to claim a refund.
For the most part, the guidance released by the Government will not come as a surprise and, indeed, many of the implications would be the same for the VAT system whether or not a deal is struck. However, insurance and financial services businesses will be disappointed to see the Government indicating that the current rules which apply in relation to input VAT recovery for supplies made to non-EU customers may not be extended to EU customers following Brexit. Given the need to ensure the UK remains a competitive financial centre following Brexit, the continuation of advantageous VAT refund rules for cross border supplies of financial services would have been welcome.
This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.