VAT could be a bigger minefield than customs after we leave the Single Market.
With hopes of a deal receding, businesses now have only months to make major changes to their VAT accounting systems.
From 1 January 2020 business that import goods from Europe will have to contend with many country-specific quirks.
For example, paying VAT in France post-Brexit transition will no longer be a simple affair. Domestic VAT legislation states that non-EU businesses that aren’t subject to a reverse charge in France need to appoint a French tax representative to operate. The tax representative is liable for any unpaid or undeclared VAT that’s due.
Finding such a representative may be easier said than done. One indirect tax expert dealing with both French and UK businesses warns:
“Trying to find businesses, which must be tax resident and accredited in France, that will act as tax representatives is not that easy because of the unlimited liability of the tax representative.
“Even in relation to transactions which the UK company might carry out that the tax representative is unaware of. It is practically impossible to get insurance for; French insurance companies will generally not cover that risk as you can’t calculate the potential exposure.”
This French foible is not the only difficulty businesses will need to contend with.
VAT rates and thresholds vary from country-to-country – if you want to import goods into Spain, for example, you have to register and pay VAT regardless of turnover.
Tamara Habberley, senior VAT consultant from The VAT People, identifies several common issues that businesses will face when importing and exporting goods from the European Community (EC).
- There is a risk of irrecoverable VAT costs due to lack of consideration of who will clear and pay import VAT on goods coming into or going out from the UK to the EC. In a worst-case scenario, businesses could incur demurrage charges if the goods cannot be cleared. They could also lose customers.
- Where a supply made between EC VAT registered businesses would be zero-rated, for non-EC VAT registered entities, VAT would apply. “Examples would be triangulation as this no longer works if a UK supplier is one of the three parties. Sales of margin scheme goods as goods moving two and from the UK as part of a chain of second-hand dealers will become “normal “non-margin scheme supplies.”
- Place of supply rules, meaning that where stock is delivered to the EC/UK to a storage facility (not a Customs Warehouse), drawn off at a later date and sold, the supplier may become liable to register for VAT in the country where the stock is held.
General VAT complications
“UK suppliers selling goods to the EC will be able to zero-rate the sale, but the EC recipient will need to pay import VAT and possibly duty to clear the goods in the EC,” says Habberley. “This VAT charge often will not create a sticking cost as the recipient will be able to recover it. But we are finding a number of EC businesses refusing to act as the importer, resulting in UK suppliers having to consider registering for VAT in other EC countries in order to retain trade with EC customers.”
EC businesses trading in the UK may also have a requirement to register in the UK, Habberley explains. This would also have an impact on EC supply chains. Transactions that would have previously fallen under triangulation simplification rules – in which supplies between three EU-countries would not require registration in any other country – would now require a VAT payment from the unregistered UK business.
“Longer-term, there are significant changes coming from 1 July 2020, with the introduction of the One-Stop Shop for supplies of goods and services to EC customers,” says Habberley. “This will result in UK businesses making supplies of goods to end consumers in the EC and any supplies of services to any EC customers via an extended version of VAT MOSS.”
There’s also the matter of cross-border VAT claims. UK firms incurring VAT in EU countries can currently claim that VAT back (subject to national rules) via HMRC’s portal. That arrangement will be in place until 31 March 2021. After that time, there is currently no provision in place to make a claim for VAT incurred in 2020, under the terms of the Withdrawal Agreement.
“We’re telling clients now: don’t leave it until 31 March next year to claim your VAT back, whether you’re a French firm claiming UK VAT or a UK company claiming EU VAT. Do it now because if you don’t, it will be too late,” says the France-based adviser.
To mitigate some of the complications, HMRC is scrapping the current physical charging of import VAT. Instead, import VAT will be accounted for by adjustments on VAT returns under a new process called postponed VAT accounting (PVA).
“PVA is an automatic process that can help minimise cash outflow for business owners,” says Steve McCrindle, a VAT expert at Haines Watts. “It will apply to all imports, both from the EU and countries outside the EU. Although there may be different regulations and a process for goods arriving into the UK where the value doesn’t exceed £135.”
“HMRC should be praised for this,” says Habberley. “…End consumers will, however, face import VAT charges to have imported goods from EC and non-EC suppliers released to them.”
What companies must do to prepare
UK businesses and EC businesses trading in the UK need to consider how it will clear and pay import VAT and duty on goods both entering the UK and going from the UK to the EC, Habberley explains. “Delivery terms will need to reflect this. In some cases, it might be desirable for UK suppliers to register for VAT in other EC countries to clear the goods and pay import VAT and duty. And in others, for EC suppliers to register for UK VAT to ease the burden for their customers.”
This has all been left quite late, says Habberley, which means this could be more challenging than it needed to be. “Many businesses have waited and waited in the hope of some form of trade deal being agreed. As it now looks unlikely that there will be a trade agreement, businesses have only a few months to make major changes to their VAT accounting systems.”
Companies must consider how and who will clear goods to and from the EC. They must also consider the cash flow implications of these changes.
There is a lack of guidance around this, and many EC businesses are taking the view that the cost an admin burden should sit with UK suppliers.
“HMRC has published guidance and to be fair, some of it is clear and helpful,” says Habberley. “However, HMRC’s remit is to advise on VAT in the UK, not on the EU VAT implications for UK businesses.”
Asa result, HMRC cannot provide guidance on whether a business is liable for import VAT on goods imported from the UK to EU countries, and if they will be able to register and recover that VAT. To avoid double or no taxation, the UK looks set to continue to apply VAT place-of-supply rules in line with EU VAT Directives, says McCrindle, with few changes to the VAT treatment of services envisaged.
“Business owners will need to think about the business’ liability to be registered for VAT within the EU or alternatively, if they can deregister within the EU. This will be especially important for businesses that provide electronically supplied services to consumers in the EU and also suppliers of goods in GB/UK to non-VAT registered customers in the EU.”
Read AAT’s guide on how VAT will change after we leave the single market.
Mark Rowland is a journalist and former editor of Accounting Technician and 20 magazine.