Since the introduction of the Single Market in 1993, there has been no VAT charged on cross border supplies of goods to business customers (B2B) based in other European Union (EU) Member States and no requirement to pay VAT on import when an EU based business brings goods in from another Member State.
Instead, supplies of goods between VAT registered entities within the EU are ‘zero rated’ for VAT purposes, provided that the customer’s VAT number in a different EU Member state is obtained and there is proof that the goods have left the country of departure.
Under the current system, the onus is on the customer to self-account for any VAT arising on the intra community acquisition of the goods on a reverse charge basis, at the rate of VAT prevailing in the country of arrival, with VIES/EC Sales and Intrastat filing obligations generally arising as part of the related procedure.
So what will change post Brexit when goods are being supplied to business customers based in the UK, including Northern Ireland?
Ultimately the VAT implications will depend on the outcome of the forthcoming Brexit negotiations between the UK and the EU. If we assume that trading with the UK post Brexit will be similar to trading with any other non-EU country the following scenarios are likely to prevail in addition to any Customs related implications:
- VAT on importation will become payable on the value of goods being brought into the UK from EU Member States (and vice versa) by both business customers and consumers (allowing for likely de minimis amounts on which VAT will not be collected).The Value for VAT purposes includes the cost of the goods, the related freight & insurance and the customs duty. In these circumstances arrangements will need to be made by importers of goods to discharge any VAT arising on import or alternatively, to put a VAT deferral account in place which involves lodging a bond with the Tax Authorities. Otherwise the goods being imported will not be released by the Authorities until the related VAT liability is paid.
- VIES/EC Sales listings and Intrastat filings which supplement details included on VAT filings will no longer be relevant for supplies of goods and services into the UK as these only pertain to cross border supplies between EU based suppliers
- UK VAT Rates may differ to those currently in existence (standard rate is now 20%) and it is possible, albeit unlikely, that the UK could reduce its VAT rates significantly to encourage trade, as it will no longer be confined by the EU requirements to maintain VAT rates within a certain range.
- VAT registration may be required in the UK by EU based suppliers maintaining ‘call off’ stocks of goods, there for draw down by single customers, where simplification measures currently exist to avoid the necessity for such registration.UK Registration requirements may also crystallise in circumstances where simplified triangulation arrangements currently applicable involving a chain supply between ‘VAT registered’ entities in 3 different EU Member States enables the avoidance of a VAT registration by an intermediate supplier. It is also possible, albeit unlikely, that the UK could oblige non-UK established service providers to register for VAT in the UK in respect of the provision of certain services to UK VAT registered entities where the VAT on such services is currently accounted for by the recipient of the services under reverse charge.
- UK VAT which is correctly chargeable to businesses established in other European Union Member States which are not obliged to register for VAT in the UK, will no longer be reclaimable under the Eighth VAT Directive Electronic VAT Refund (EVR) scheme. This VAT will most likely have to be reclaimed under the Thirteenth VAT Directive Claim procedure which currently applies to businesses in other non-EU Countries.
- The VAT Margin schemes currently in operation throughout the EU which apply to sales of second hand goods (including cars), works of art, tour operators/travel agents etc. across the European Union may no longer apply in the UK post Brexit.
- Distance Sales (i.e. sales of goods from a business in one EU Member State to Consumers based in other EU Member Satiates) thresholds will no longer apply in respect of supplies of goods from the EU to UK based consumers and in respect of supplies of goods to EU based consumers by UK based suppliers.
It will also be a lot more cumbersome for goods to be supplied cross border to consumers both by UK suppliers into the EU and EU suppliers into the UK due to VAT and possibly Customs duty liabilities crystallising at the time of importation.
At least some of the above scenarios will result in additional administrative requirements and cash flow management costs.
Additional Administration costs include staff costs in preparing and processing the necessary back up detail, obtaining professional advice regarding the VAT implications of trading with the UK, registering for VAT and additional compliance obligations – filing VAT returns etc.
Cash flow management will become critical when managing the time lag between paying and reclaiming VAT because if not managed effectively it can give rise to financial negative cash flow implications / additional working capital requirements as VAT on importation of goods may not be refunded for a matter of months or even longer.
Under the likely new regime VAT physically paid on importation or paid using a deferral account should continue to be reclaimable in line with current rules underpinning entitlement to VAT recovery with Single Administration Documents (SADs) being required when reclaiming VAT paid on import in Ireland and C79s in the case of UK VAT on import.
So what VAT steps should exporters and importers take now in preparation for Brexit?
Be Brexit ready – Start to review your business strategy with regard to the likely impact of Brexit on your business and try to minimise any negative VAT impact as much as possible. Please see below for further suggestions on how you can become Brexit ready:
- VAT deferment facility – This should be considered in the context of bridging the gap between paying the VAT on importation and reclaiming it.
- Delivery Terms - Serious consideration should be given to the terms of delivery agreed with suppliers. DDP as opposed to DAT/DDU should be preferred. This also needs to be considered from a commercial perspective.
- Review your supply chain – Have a Brexit Impact study carried out on your business with a view to identifying what steps can be taken at this stage to avoid potential exposure to your business.
BDO is actively working with a number of our clients to examine their supply chains to determine the risks of Brexit to their businesses. We are considering what alternative strategies can be taken to plan as early as possible, rather than them running the risk of being exposed following the conclusion of the negotiations between the UK and the EU.
For more information about our partnership with BDO Ireland click here.