The transition period immediately following the UK’s departure from the EU on 31 January 2020 will come to an end on 31 December. At that point, the UK will cease to be a member of the Single Market and Customs Union, and will no longer be a part of the EU VAT system. This has significant VAT implications for UK suppliers involved in international supply chains.
Whilst Covid-19 has caused several VAT-related changes to be delayed, at the time of writing we are not expecting the final stage of Brexit to be postponed. Despite lockdowns across Europe during 2020, negotiations regarding a high-level trade deal between the EU and the UK have been ongoing, although recent reports suggest that reaching a deal before the end of the year may be a challenge. Issues associated with state aid and fishing rights present stumbling blocks to the early conclusion of a trade deal. Should the transition period end with no trade agreement in place, the UK will revert to World Trade Organisation (WTO) trading and customs terms.
The movement of goods
The movement of goods between the UK and the EU will represent imports and exports which in principle will be subject to customs controls and taxes. This will include items such as yachts, aeroplanes, cars and works of art. UK parties purchasing goods from the EU, or bringing goods already owned from the EU into the UK, must ensure that they are registered with an EORI (Economic Operator Registration Identification) number prior to 1 January 2021. Otherwise they will face issues with clearing goods into the UK. The following points are particularly noteworthy:
- UK importers will be able to take advantage of deferred import VAT payments, easing the cash flow burden of having to pay import VAT in advance of being able to reclaim it through the normal VAT return compliance process. There are also deferred declaration opportunities to make the importation process a little easier, particularly in the initial period after the end of the transitional period.
- UK exporters to the EU will need to review the International Chamber of Commerce’s International Commercial Terms (incoterms) to ensure that the customer receiving the goods is the importer of record. This will avoid a possible overseas VAT registration requirement for the UK exporter.
- The EU distance selling rules will no longer apply, and UK suppliers to EU consumers may be required to cancel any VAT registrations they currently have in the EU. Retail products may become more expensive for EU consumers to purchase from the UK, owing to the imposition of tariffs on imported goods.
- UK companies currently relying on simplifications such as triangulation in order to avoid the need to register for VAT in an EU Member State, will need to assess their position. Such arrangements will no longer be available, and this may result in multiple VAT registration requirements, as well as potential VAT inefficiencies in the supply chain.
The service sectors
The position for services is one which will continue to evolve, with many aspects yet to be determined.
One immediate change will be for UK suppliers currently taking advantage of the EU Mini One Stop Shop (MOSS) to account for VAT on telecommunications, broadcasting and digital services supplied to consumers. From next year, such suppliers will need to change to the non-EU MOSS if they wish to avoid having to register for VAT in each Member State to which they supply digital services. This will probably entail registration through the Irish MOSS portal (for language reasons if nothing else) in readiness for the switch on 1 January 2021.
A more positive impact is expected in the financial services sector. Under current rules, suppliers of certain financial and insurance services can reclaim input VAT on costs incurred in connection with supplies to non-EU customers. It is expected that this facility will be extended when the UK leaves the EU VAT system, to include customers based in the EU. This will result in the financial services and insurance sectors enjoying a higher rate of VAT recovery than is currently the case.
It is less clear at this stage whether, and indeed when, elements of current VAT legislation such as the use and enjoyment rules, and the definition of a relevant business person for place of supply purposes, will be updated.
As trade talks between the UK and the EU continue to run into obstacles, it remains unclear what the landscape will look like when the transition period comes to an end. If there is no trade deal and the UK reverts to WTO rules, this will directly affect Customs Duty rates in particular. However, there will be a temporary reduced tariff for 12 months, meaning lower duty rates, and no duty at all in the case of some categories of product for the initial period. Import VAT will be payable at 20%, unless the goods qualify for either 5% or 0% VAT under domestic VAT law. The service sector will also see VAT changes, but these will take time to be implemented. Service providers will need to be mindful of a changing VAT landscape beyond the end of the transition period.