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What Brexit means for VAT-registered businesses

25 June 2019

It's the word we all dare to mention however whether the UK leaves the EU with a deal or not businesses need to consider the potential implications which may ensue.

Of course there remains a possibility that the current Government fails to deliver on Brexit which could force a general election and as a result the decision to exit the EU is reversed. However in this article I explore what Brexit could mean for VAT-registered businesses and how to prepare for it despite the ongoing uncertainty.

Brexit is most likely to result in either a) a reformulated Withdrawal Agreement being negotiated with a new long stop date of the 31 October 2019 or b) a no deal Brexit (what is often referred to as a hard Brexit).

In reality how VAT will actually be handled once the transition period ends in the event of a negotiated withdrawal is still up for discussion between the UK and the EU. However the end result of Brexit will ultimately be the same if there is a negotiated withdrawal or a no-deal. Below are some of my predictions of potential reforms based on guidance available:-

Business-to-business supply of goods within the EU

At present where the vendor and customer are in different Member States of the EU and both are VAT-registered business to business supply of goods has a VAT accounting impact however there is no cash flow impact as sales are typically invoiced by the EU VAT registered vendor at zero rate. The customer then accounts for the purchase at the local VAT rate directly on their VAT return.

Deal

Unless there's an agreement to the contrary before the end of the Brexit transition period VAT-registered businesses which purchase goods from across the EU/UK border will need to pay and account for VAT when goods clear customs. This may drive a need for additional working capital.

It's not clear if any schemes will be implemented to make it easier for businesses in terms of cash flow or administrative costs although it seems reasonable to anticipate this.

No deal

As of 31 October 2019 EU VAT-registered businesses which purchase goods from UK VAT suppliers will need to pay VAT prior to any goods clearing customs. This result may drive a need for additional working capital.

However UK-based businesses importing into the UK (including from the EU) will use what is known as 'postponed accounting' to avoid the cash flow impact. This means businesses will be able to account for import VAT in their VAT returns rather than paying it as the goods arrive at the UK border.

Goods sent by post

The UK and many other countries currently operate a Low Value Consignment Relief (LVCR) scheme which means VAT isn't applied to goods sent to the UK if parcels have a declared value below 15 in respect of commercial goods.

Deal

Parcels arriving in the UK from other countries (both within the EU and elsewhere) will have VAT applied (unless the goods are not eligible for VAT such as zero-rated children's clothing).

The UK had previously indicated that LVCR will be withdrawn prior to Brexit; however it has accelerated these plans and now intends to remove this relief for all parcels entering the UK irrespective of origin on 1 November 2019.

For low-value items the sender can pre-pay the VAT. However if the VAT is not pre-paid then the recipient must pay the VAT on receipt of the parcel.

For parcels sent to the UK on or after 1 November 2019 the UK will implement a technical solution using a digital service to let business senders of low-value items (currently below 135) pay the VAT prior to the goods entering the UK.

Businesses can register now so they're ready to make the payments or they can update their procedures so to allow them to pay the VAT as required via their postal operator. .

These new rules cover all parcels which could be sent by post even if they're sent by a different method such as courier or even if an employee is bringing business items back via a business trip.

Failure to pay the import VAT could lead to a 1000 fine.

No deal

This will be the same as if there's a deal because LVCR is being withdrawn on 1 November 2019.

Other points of consideration

For businesses supplying digital services the place of supply will continue to be where the customer resides. For insurance and financial services input VAT deduction rules might change (that is to say the amount of VAT paid upon purchasing the services) and the UK government promises more information on this in due course.

Those businesses using the UK VAT Mini One Stop Shop (MOSS) will need to register for the VAT MOSS non-Union scheme in each EU Member State which can only be done post-Brexit or they can simply register for VAT in each EU Member State where sales are made.

UK businesses will lose access to the EU VAT refund system and will need to use existing processes which are currently applied to non-EU businesses. How they claim VAT refunds varies across the EU so there will be varying administrative requirements.

Conclusion

Life is going to get more complicated for businesses following Brexit regardless of what happens however as with any change it will soon become ingrained and therefore I have no doubt businesses will adapt accordingly.

I came across a quotation by an anonymous source which I think is what VAT-registered businesses need to focus on. It read Preparation for the known makes time for coping with the unknown. For now all we can do is prepare as best as we can based on the facts we have to hand and to continue to act as and when changes occur. PraxisIFM is committed to supporting its clients through these changes to ensure a smooth transition post Brexit deal or no deal.

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