The Chartered Institute of Taxation (CIOT) and the Institute of Chartered Accountants in England and Wales (ICAEW) have issued the first in a series of fact-sheets on the impact of the UK’s withdrawal from The European Union. The main purpose of the first fact-sheet is to outline the purpose and effect of The Taxation (Cross-border Trade) Act 2018, which received Royal Assent on 13 September 2018.
The government has published the first 25 of a series of technical papers on how the UK will be affected by Brexit if on 29 March 2019 no deal with the EU has been reached. The “no deal” scenario is possible if the UK government and the EU cannot agree terms and the UK therefore becomes a third country at 11pm GMT on 29 March 2019 without a Withdrawal Agreement or a framework for a future relationship in place between the UK and the EU.
A no-deal Brexit could mean lorry queues building up at ports as the previously smooth import and export of goods in the Single Market ends, to be replaced by new customs checks. Goods which are meant to arrive ‘just in time’ or are perishable, could be subject to delay, affecting stocks, production and ultimately sales.
Below is a summary of the main VAT issues. More detail on trade, import and export procedures can be found here.
VAT before 29 March 2019
Under current VAT rules:
- VAT is charged on most goods and services sold within the UK and the EU.
- VAT is payable by businesses when they bring goods into the UK. There are different rules depending on whether the goods come from an EU or non-EU country.
- goods that are exported by UK businesses to non-EU countries and EU businesses are zero-rated, meaning that UK VAT is not charged at the point of sale.
- goods that are exported by UK businesses to EU consumers have either UK or EU VAT charged, subject to distance selling thresholds.
- for services the ‘place of supply’ rules determine the country in which you need to charge and account for VAT.
VAT after 29 March 2019 if there’s no deal
The UK will continue to have a VAT system after it leaves the EU. The VAT rules relating to UK domestic transactions will continue to apply to businesses as they do now.
If the UK leaves the EU on 29 March 2019 without a deal, the government’s stated aim will be to keep VAT procedures as close as possible to what they are now. However, if the UK leaves the EU with no agreement, then there will be some specific changes to the VAT rules and procedures that apply to transactions between the UK and EU member states.
UK businesses importing goods from the EU
In a no deal scenario the current rules for imports from non-EU countries will also apply to imports from the EU. Customs declarations would be needed when goods enter the UK (an import declaration). This means customs duty may also become due on imports from the EU customs checks may be carried out and any customs duties must be paid – import VAT would be payable on such goods.
If the UK leaves the EU without an agreement, the government will introduce ‘postponed accounting’ for import VAT on goods brought into the UK. This means that UK VAT registered businesses importing goods to the UK will 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. This will apply both to imports from the EU and also non-EU countries. More detail on these processes can be found in the ‘Trading with the EU if there’s no Brexit deal’ technical notice. More guidance setting out further detail on accounting and record keeping requirements will be issued in due course.
Goods entering the UK as parcels sent by overseas businesses
VAT will become due on goods sent as parcels from overseas busniesses. 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. For parcels valued up to and including £135, the Government states that a technology-based solution will 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 HM Revenue & Customs (HMRC) digital service and account for VAT due.
For goods worth more than £135 sent as parcels VAT will continue to be collected from UK recipients in line with current procedures for parcels from non-EU countries.
Exporting goods to the EU
UK businesses would need to plan for customs and VAT processes, which will be checked at the EU border. So they should check with the EU or relevant Member State the rules and processes which need to apply to their goods.
Exporting goods to EU businesses –VAT registered UK businesses will continue to be able to zero-rate sales of goods to EU businesses, but will not be required to complete EC sales lists. UK businesses exporting goods to EU businesses will need to retain evidence to prove that goods have left the UK, to support the zero-rating of the supply. The required evidence will be similar to that currently required for exports to non-EU countries with any differences to be communicated in due course.
Import VAT at the rate due on the Member State and customs duties will be due when the goods arrive into the EU. UK businesses nwoudl need to check the relevant import VAT rules in the EU Member State concerned.
Exporting goods to EU consumers -if the UK leaves the EU without an agreement, the VAT distance selling arrangements will no longer apply to UK businesses and UK businesses will be able to zero rate sales of goods to EU consumers.
Current EU rules would mean that EU member states will treat goods entering the EU from the UK in the same way as goods entering from other non-EU countries, with associated import VAT and customs duties becoming due when the goods arrive into the EU.
Supplying services into the EU from the UK
If the UK leaves the EU without an agreement, the main VAT ‘place of supply’ rules (which determine the country in which you need to charge and account for VAT) will continue to apply in broadly the same way that they do now, with areas of potential change flagged below.
Digital services to non-business customers – the ‘place of supply’ will continue to be where the customer resides. VAT on services will be due in the EU Member State within which your customer is a resident.
Insurance and financial services – if the UK leaves the EU without an agreement, input VAT deduction rules for financial services supplied to the EU may be changed.
Tour Operators -businesses that buy and sell on certain travel services that take place in the EU use the Tour Operators Margin Scheme. HMRC state that they will continue to work with businesses to minimise any impact.
VAT Mini One Stop Shop (MOSS)
MOSS is an online service that allows EU businesses that sell digital services to consumers in other EU member states to report and pay VAT via a single return and payment in their home Member State. Non-EU businesses can also use the system by registering in an EU Member State.
If the UK leaves the EU with no agreement, businesses will no longer be able to use the UK’s Mini One Stop Shop (MOSS) portal to report and pay VAT on sales of digital services to consumers in the EU.
Businesses 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. This can only be done after the date the UK leaves the EU. The non-union MOSS scheme requires businesses to register by the 10th day of the month following a sale. You will need to register by 10 April 2019 if you make a sale from the 29 to 31 March 2019, and by 10 May 2019 if you make a sale in April 2019.
Alternatively, a business can register for VAT locally in each EU Member State where sales are made.
EU VAT refund system
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.
EU VAT Registration Number Validation – accessed via the EU Commission’s website
If the UK leaves the EU without an agreement, UK businesses will be able to continue to use the EU VAT number validation service to check the validity of EU business VAT registration numbers. UK VAT registration numbers will no longer be part of this service. HMRC is developing a service so that UK VAT numbers can continue to be validated.
Businesses in Northern Ireland importing and exporting to Ireland
There is no detail on trade between Northern Irleand and Ireland except that the paper states that in a no deal scenario, the UK would ‘stand ready to engage constructively to meet our commitments and act in the best interests of the people of Northern Ireland’.
Welcome to our Spring/Summer news update. It’s been a busy few months since our last update in January. There’s more detail in the links below.
The triggering of Article 50 and the UK’s eventual departure from the EU will have a major impact on UK VAT in the future as we discuss here.
Making Tax Digital
HMRC’s proposals to ‘Make Tax Digital’ will eventually affect how all businesses make tax and VAT returns (though there is a proposed exemption for charities) and is likely to require all businesses to adopt digital accounting and /or adapt their software packages. Whilst the legislation was cut from the Finance Bill due to the election we are told this is a deferral only. There is more detail on the proposals here.
Cultural and Educational exemptions
The European Court has recently decided that the UK is entitled to deny exemption to film screenings by non-profit making bodies in the case of BFI. That means there will be no extension of exemption to other areas, but Brockenhurst College was successful in arguing that the catering and theatrical activities its students provided to third parties were exempt because they were closely related to the education of the students.
Finally HMRC have updated their guidance on deduction of VAT by holding companies following cases hear on the CJEU. It was expected this would be issued as an HMRC brief but instead HMRC have updated several parts of their Manuals. This will affect recovery of VAT on mergers and acquisitions
As always if you have any questions on VAT give us a call on 0208 492 1901 or drop us an email.
At the end of last month the UK formally triggered Article 50 and the Government published a White Paper on the Repeal Bill, which has clarified how the UK will treat existing European Case law after the UK leaves the EU. This will impact on the future of VAT. Details of the repeal bill can be found here
Currently the European Communities Act 1972 (ECA) gives effect to EU treaties in UK law and provides for the supremacy of EU law. It also requires UK courts to follow the rulings of the Court of Justice of the European Union (CJEU). Some EU law applies directly without the need for UK implementing legislation, but other parts of EU law have to be implemented in the UK through via domestic legislation.
The intention is that the Repeal Bill will repeal the ECA. It will also convert EU law into UK law as it stands at the point of the UK’s exit from the EU. This will give some certainty to businesses and allow them to continue operating in the knowledge that rules will not change significantly and suddenly on the UK’s exit from the EU. It will then be down to Parliament or where appropriate, the devolved legislatures, to amend, repeal or change any piece of EU law (once it has been brought into UK law) once the UK is out of the EU.
The Bill creates powers to make secondary legislation to enable corrections to be made to laws that would otherwise no longer operate appropriately once the UK leaves the EU and will also enable changes to domestic law to reflect the content of any withdrawal agreement made under Article 50. It will also give the UK Government once we havelef the EU powers to change the scope and operation of domestic VAT .
Existing EU case law
Following the EU referendum, there had been significant speculation and varying views on how the UK would treat existing CJEU case law, and its impact on the UK tax legislation once the UK leaves the EU. The repeal bill clarifies that case law precedent from the CJEU will continue to apply (for a time at least) and that any uncertainties/disagreements over the meaning of UK law after the UK leaves the EC derived from EU cases will be decided by reference to the CJEU case law as it exists on the day the UK leaves. So the European Court of Justice will no longer have any jurisdiction in the UK, but its existing case law, up to the date of withdrawal, will continue to be binding on UK courts as they interpret EU law that has been converted into domestic law.
The bill is therefore likely to give CJEU case law similar precedent status to decisions of the UK Supreme Court and both HMRC and appellants may continue to rely on case law as they have up to this point. After exit UK legislation (including that relating to UK VAT) passed by Parliament will take precedence over preserved EU-derived law and thus UK VAT and tax law is likely to start to diverge from EU law gradually as UK case law develops. The Office of Tax Simplification is also currently considering changes to UK VAT that could be made once the UK exits the EU.
Some bills will be necessary to ensure the law continues to function properly from day one, and this includes a Customs bill to establish a framework to implement a UK Customs regime, because this cannot be met by incorporating EU law.
The likelihood is that a Customs border will come into existence early in 2019 with the potential to cause disruption to movement of goods coming in and out of the UK. It is hoped that the Government will publish proposals as soon as possible. The Customs Declaration Services (CDS) programme was intended to replace the existing system for handling import and export freight (CHIEF) from January 2019. Now that the Government has made a decision to leave the EU Customs Union, there is serious concern that this project will be in place on time.
There is still much uncertainty which can only be addressed when the terms of the UK’s departure from the EU are clearer.
The European Commission has adopted a package of proposals to facilitate cross-border B2C e-commerce in the EU (see www.bit.ly/2gLHVns). The majority of the proposals were set out in the Commission’s recent VAT action plan.
The proposals include:
- a new threshold to be introduced in 2018 which allows small businesses to account for VAT in their home jurisdiction if their cross-border turnover on supplies of e-services is less than €10,000
- the process will also be simplified for businesses whose cross-border turnover is less than €100,000 by only requiring them to obtain one piece of evidence for identifying the location of their customers, rather than two.
- The mini-one stop shop (MOSS) which already applies to e-services will be extended in 2021 to the online supply of goods, to allow online businesses to account for VAT under a single quarterly return via a portal in their home jurisdiction. The thresholds set out above will then also apply to goods sold online from 2021. This proposal is intended to be less costly for businesses that will no longer need to register in multiple jurisdictions.
- The current exemption from VAT for imports worth less than €22 from outside the EU will be removed from January 2021, on the basis that it leads to unfair competition for EU companies who have to charge VAT on the supply, and creates the opportunity for VAT fraud by mis-declaring the value of goods.
- electronic publications – Member states will also be able to apply the same reduced or zero rate to as they do to their printed equivalents. Under the current rules, e-publications must be taxed at the standard rate. This change will enter into force once the proposal is agreed by all member states.
Why it matters
In addition to e-book suppliers, these measures should be welcomed by all SME cross-border businesses, which should benefit from reductions in EU VAT compliance costs. It seems likely however, that the UK will have left the EU by the time most of these changes come into effect. This does not mean that UK businesses selling into the EU can ignore the changes. It is just that they are likely to lose the ability to use the MOSS in the UK. They will therefore need to register in each EU country or register to use the MOSS in another EU country.
Welcome to our latest VAT Newsletter. Please click on the links below to read the articles.
VAT Case Update
Recently cases have been heard on the following issues:
- whether services are ‘closely related’ to education Read more
- whether income from finance actvities are ‘incidental’ Read more
The EU Commission has issued a document on its proposed digital single market strategy for SMEs which, despite Brexit may affect UK businesses with cross border trade in the EU Read more
The Office of Tax Simplification has issued its terms of reference for its review of UK VAT Read More
In the April/May Newsletter we outlined what might happen if the UK voted to leave the EU. Following Friday’s result here’s a more detailed look.
What happens to VAT now?
In the short term, nothing changes. Formal exit would start when (or is it if?) the UK triggers Article 50 of the Lisbon Treaty, which covers the voluntary exit of an EU member state. There would then be a renegotiation period of up to two years when the UK and remaining 27 member states will agree separation terms. This will include agreeing on how UK companies will comply and report VAT transactions with companies and individuals in the rest of the EU.
The Brexit vote is therefore unlikely to result in immediate changes to indirect tax law, practices and policy. But on formal Brexit there will be major changes coming.
What will happen to EU trade?
If and when we leave the EU it is unlikely that UK businesses will be able to trade in goods across the EU in the same way that they have been doing since the single market was introduced in 1993. The major VAT change would be the loss of intra-community trading status. Instead of zero-rating B2B sales to EU companies, transactions will be treated as imports into the EU (exports from the UK), and subject to EU VAT. The requirement to complete Intrastat and EC Sales Lists will end, but new import and export documentation, generally done by the freight forwarders or customs brokers, will have to be completed. This can cost around £20 per export or import. We would also have a new Customs land border with Ireland.
The Mini One-Stop Shop or ‘VAT MOSS’ that was so much in the headlines recently would continue for businesses selling electronic services to consumers in the EU. UK businesses making such supplies would still have to register, either by registering in every member state into which the supplies are sold, or via the MOSS. The main change here is that UK suppliers would have to choose an EU member state in which to register under the MOSS. Unfortunately, the plans for a minimum supply threshold for VAT MOSS registration that was so hard fought for by micro-businesses and the UK government is now likely to be abandoned by the rest of the EU.
In the future
Without the VAT Directive and the European law framework, a major issue will be around the interpretation of VAT law. Tax law is interpeted by the courts and thus is subject to change according to tax cases. Before the UK actually secedes, the UK courts are still bound by decisions of the Court of Justice. With effect from the date of secession, taxpayers will no longer be able to rely on the “direct effect” of EU laws and the UK Supreme Court will become the final arbiter of all cases relating to VAT, instead of the European Court of Justice (ECJ). But of course previous UK court decisions will in many cases have been decided by reference to the VAT Directive and ECJ cases, so it’s far from clear how the courts will deal with this. In addition there are likley to be “holes” left in UK law which will need to be plugged. All of that is going to take time. The VAT rules in the UK, in common with many other parts of our legislation have evolved over the last 40+ years using EU concepts; the UK courts will in future need to build a whole new framework of interpretation. That could mean we will have to revisit many questions about how VAT works in the UK.
The current EU rules are: a minimum 15% standard rate; and only two reduced VAT rates which must be 5% or higher. On secession the UK will be able to set its own standard rate (or introduce higher rates) and to change reduced VAT rates on products like domestic fuel, women’s sanitary products and e-books. The EU has however already announced plans to allow similar freedoms to other EU countries within the next 18 months under the current EU VAT Plan.
Similarly, the UK will no longer be required to keep the VAT exemptions (mostly there for social reasons, but also applied to many financial transactions) in the EU VAT Directive. The UK will be able to set its own exemptions, change the current ones or remove them. It seems unlikely that the UK would want to impose significant change on financial services but it could, for example choose to ignore recent changes, which were not to its liking, such as the imposition of taxation on outsourced financial services.
Changes to other social exemptions could have major implications for the cultural, leisure and charitable sectors. Some of these, including the cultural services, sporting and education exemptions, have been the subject of VAT planning and contentious VAT claims. Change may be some time off, but the UK (or England if it comes to that) could in future move to prevent what it sees as anomalous treatments, when it will be able to do that without reference to any overriding EU legal principles.
If you have other immediate questions not answered above, please get in touch.
Brexit – what happens to VAT if the UK votes to leave the EU?
A vote in favor of exit from the EU would trigger a period of negotiation about exit terms, which would be likely to take several months at least. EU laws and treaty obligations would continue to have effect until agreement was reached. This could be for two years in the absence of agreement or longer if there is an agreement to extend the negotiation period.
Therefore, in practice, a vote in favor of Brexit is unlikely to result in any immediate changes to indirect tax law, practices and policy, but in the long term, changes would be likely to VAT, Customs Duty and Excise Duty. If there is a vote in favor of Brexit, EU law considerations might have less impact, though taxpayers will still be able to rely on the “direct effect” of EU law until the secession process is complete, and potentially afterwards in relation to “pre‑secession” transactions.
VAT could be materially affected by secession from the EU. Freed from the need to comply with EU VAT law, it is possible that the UK would decide on a wholesale review of the scope and coverage of VAT. In theory, the UK could even replace it altogether, possibly with a goods and services tax, a sales tax of some kind or even something like the UK’s old purchase tax – collected at the wholesale stage. However given the global trend towards VAT as the indirect tax system of choice, such a radical change seems unlikely and so VAT in some form is likely to stay with us even if the UK leaves the EU.
With effect from the date of secession, taxpayers will no longer be able to rely on the “direct effect” of EU laws and the EU approach to the interpretation of UK VAT law may be less widely applied. The UK courts would revert to interpreting UK VAT provisions and might have little regard to decisions emerging from the European Court though UK VAT law will still have its roots in EU law, and that makes it unlikely that future CJEU case law will simply be ignored by the courts and tribunals when applying UK provisions.
After Brexit the UK would no longer have to comply with EU VAT law (on rates of VAT, scope of exemptions, zero‑rating, etc.) and so the UK would have more flexibility in those areas. Future governments could consider such changes as the restoration of zero‑rating for domestic fuel and power and reinstatement of the VAT relief for energy saving products (changes which were enforced on the UK by the EU commission), or the widening of exemptions.
For businesses, the practicalities of cross‑border transactions may change following secession. Invoicing and reporting processes could be revised for cross‑border supplies and certain sectors may see major changes – for example businesses in the travel sector may no longer be required to account for VAT under the Tour Operators Margin Scheme. Suppliers of B2C e‑services to the remaining EU countries will have to consider the impact on their VAT accounting under the VAT Mini One Stop Shop.
It is likely that even after secession there would be disputes between taxpayers and HMRC over transactions that predate Brexit and in those cases EU law would still be in point (with the potential for the Tribunals and courts to need to refer questions to the CJEU).
Upper Tribunal confirms principles for recovery of VAT on overhead costs
A farming company bought (and paid VAT on) tradeable Single Farm Payment Entitlement units, which entitled the company, subject to fulfilment of conditions, to benefits under the EU Single Farm Payment scheme. HMRC refused the company’s claim to recover the £1,054,852.28 of VAT incurred, arguing that it related to the “non-business” receipt of the EU payments or, alternatively, that the cost of the units was not reflected in the price of the various farm products, etc., sold by the company and was not therefore a “cost component” of its taxable supplies. HMRC sought to argue that the units had been acquired for the non-business purpose of obtaining SFPs and so no right of deduction arose. The Taxpayer argued that the receipt of SFP income was not an end in itself but a means of fund raising for the company’s taxable business. Farmers who bought SFP Units all intended to use the SFP income to fund their businesses. The FTT rejected HMRC’s contentions and HMRC’s appeal was rejected by the Upper Tribunal which decided that there was ample evidence to justify the FTT’s finding that the acquisition of the units, and the income stream that resulted from that, was not a separate activity and so was part of the farming business, and allowed the business to recover the VAT.
Why it matters
The key question is whether costs which are incurred for business purposes have any direct and immediate link to an exempt supply. If yes then the link between taxable supplies is broken, but if not, the cost is either directly attributable to a taxable activity and VAT is fully deductible, or it is an overhead cost and, as such, is directly and immediately linked to the whole of the business’s activities. It is not appropriate in that case to look for the activity to which the expense is most closely related.
Partial recovery will be available according to the business’s overall mixture of taxable and exempt activities except where the business has, in addition to taxable and exempt business activities, any ongoing non-economic (non-business) activity.
European Commission’s Action Plan on VAT
The European Commission has published its Action Plan on VAT, setting out its thinking on the future development of the EU VAT system. The plan includes proposals to tackle fraud, initially by information exchange, and sharing of good practice by Member States. In the very long term the EU envisages a system where suppliers making intra-EU sales will be required to charge and account for VAT at the VAT rate due in the destination country, with the VAT accounting being based on a variant of the current “Mini One-Stop Shop” (MOSS) for e-services. The plan also sets out options for relaxing the restrictions on the use of reduced rates. It aims to initiate political discussions on the issue, with a view to making formal legislative proposals in 2017 but this seems very ambitious. The Commission also expects to progress its “digital single market” plans with legislative proposals intended to simplify cross-border trade, especially for SMEs, by extending use of the MOSS to B2C supplies of goods; introducing an additional, EU wide VAT/MOSS registration threshold for cross-border trade, to avoid the need for very small businesses to register and account for VAT; and the abolition of the current “low value imports” regime, under which many low value consignments enter the EU VAT and Duty free.
FTT suggests that partial exemption method carries over on VAT grouping
The First-Tier Tribunal has decided that an appeal by Dynamic People Ltd against HMRC’s refusal of a proposed partial exemption (PE) method was based on a misunderstanding and that it had no jurisdiction to consider it. Before it was VAT grouped, the company had an approved PE method based on floor space and when it joined the VAT group, it applied to use a method that was broadly based on the old approved method. HMRC declined to approve the method and the company appealed. The Tribunal took the view that as the old method had not been formally revoked, its use carried over to the VAT group, and hence that there was no need for a new method, so the whole basis for the appeal was flawed. HMRC’s presenting officer was unable to explain why a new method was needed.
Why it matters
This is an odd case and it is not clear the Tribunal is correct. When a new VAT group is created this creates a new “taxable person” distinct from the previous registered person. That is why HMRC usually insist on a new method for the group, to reflect the new combined activities of the companies within the group. However, even if the Tribunal was not technically correct, if they consider that the old method was not appropriate for the group it seems that all HMRC have to do is issue a direction that the current method is not fair and reasonable and then the parties will be able to seek to agree a new method.