BREXIT UK to leave EU VAT regime 2020
- 2015 MOSS
- 23 June 2016 | Richard Asquith
On Thursday 23 June 2016, the UK public voted to leave the European Union.
Referred to as ‘BREXIT’, the vote may result in the UK no longer being required to comply with the Union’s EU VAT regime after a two-year negotiation period. There will be no change until at least 2020, possibly longer so companies can continue to trade and plan as normal.
Whatever the final settlement is, it will likely result in more VAT compliance complexity for companies selling from or to the UK. This could include non-tariff 'frontier burden' of €4 billion for UK exporters. In addition, there is likely to be changes in customs costs for sellers / drop shipments into the UK as the country may have to leave the EU Customs Union.
What next for UK VAT?
The UK will need to trigger Article 50 of the Lisbon Treaty which covers the voluntary exit of an EU member state. This may come in the next months. There will 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.
Until that negotiation is concluded, all existing EU VAT rules will apply to UK businesses and consumers.
What will change?
Many areas of shared VAT practices will be reviewed and revised. These will include:
Upon completion of the exit negotiations, the UK will no longer be required to follow the EU VAT Directive or European Court of Justice (ECJ) rulings. Instead, the UK’s VAT Act will take supremacy. The UK government will be free to amend the Act to reflect its fiscal policy objectives.
Whilst the ECJ will no longer be the last court of appeal for UK VAT issues following a UK exit, disputes will still refer to the EU VAT law in place at the time of the issues in dispute. This could mean UK VAT cases being judged on EU law until new, UK case law or statues are in place.
Exit from the single market
The major VAT change for UK companies following BREXIT will be the loss of their intra-community trading status. So, for example, instead of zero-rating B2B sales to EU companies, transactions will be treated as imports into the EU, and subject to EU VAT. The requirement to complete Intrastat and EC Sales Lists will go, but new import and export documentation will need to be completed. This is generally done by the freight forwarders or customers brokers. This can cost around £20 per export or import.
It is likely that the UK will remain a member of the European Economic Area. This should mean that other EU member states will not be able to require UK companies to appoint local fiscal representatives in their countries to report local sales.
It has been estimated that the additional, non-tariff expenses of this change could amount to €4 billion in EU ‘frontier costs’ for UK exporters - based on the level of UK exports of goods to EU and EC's estimates of costs of being outside the Single Market.
UK to join the EEA?
It is possible that the UK could become a member of the European Economic Area, which participates in the Single Market encompassing the free movement of goods, services, people and capital. At present, the EEA includes all 28 members of the EU, plus Norway, Iceland and Liechtenstein.
This would give the UK many of the benefits of free trade with the EU, although it would lose the right to have a veto or vote over any EU laws passed that are imposed on EEA members. The UK would have to make a major annual financial contribution to join the EEA.
The EEA does not cover indirect tax, so the UK would remain outside of the EU VAT regime in this case. The EEA does not cover customs union either. To remain part of the EU's customs union, the UK could enter into a similar arrangement with the EU as Turkey has.
Freedom to set UK VAT rates
The UK will no longer be constrained by the EU VAT Directive on setting its VAT rates. The current EU rules are: a minimum 15% standard rate; and only two reduced VAT rates which must be 5% or higher. The UK will therefore be uninhibited to change reduced VAT rates on key products like domestic fuel, women’s sanitary products and e-books. However, it is likely that the EU will allow similar freedoms to other countries within the next 18 months.
Distance Selling Thresholds
Following BREXIT, small UK-based sellers of goods to EU consumers would lose the benefit of the EU distance selling threshold relief. This relieves them of the obligation to VAT register in each country where they are selling until they hit the local VAT registration threshold. This change may well dissuade small e-commerce sellers from promoting EU sales – including geo-blocking on websites – because of the extra foreign VAT compliance burdens and costs.
MOSS reporting continues
The good news for UK providers of digital services to consumers in the rest of the EU is that they could continue to use the one-stop VAT reporting portal, MOSS. This is available to ‘non-union’ companies from outside of the EU as well as EU-based providers for reporting and remitting VAT on local sales. But the UK HRMC would no longer support reporting into the EU. So UK providers reliable to charge EU VAT would now have to register in another EU state to recontinue MOSS reporting.
However, the limited exemptions offered to UK micro-businesses by HMRC under the 'hobbies rule' will no longer be available. This will mean many micro businesses in the UK will now have to register in one of the EU states to gain access to reporting to all 27 remaining member states.
EU VAT recovery
UK companies will lose the right to use the simplified 8th Directive online VAT recovery system for their EU VAT reclaims. Instead, since they will be non-EU companies, they will have to resort to the paper-based 13th Directive regime. This is slower, and prone to challenges from the tax authorities.
Use and enjoyment rules
BREXIT will mean a change in the advantageous use and enjoyment rules for UK companies. For example, where UK companies, including EU headquarters of US companies based in the UK, purchase EU-wide software licenses, EU VAT will now be charged – instead of zero-rated reverse charge. The UK company would then have to attempt a foreign VAT reclaim
Changes in accounting and invoicing software will be required to recognize all of the above. This will include new tax code schemas.
Tour Operators Margin Scheme (TOMS)
UK tour holiday operators would leave the EU's TOMS regime which regulates the charging of EU VAT. As travel in VAT zero rated in non-EU countries, such services by UK operators would become cheaper.
Unlike VAT, member states do not have their own Customs laws; instead they are part of the single Customs Union. So the UK will have no equivalent of the VAT Act to fall back on. The UK will leave the EU's Customs Union in two years. It will lose the benefit of the low/nil customs and duty rates in the single market. This will potentially raise the landed costs of goods into the UK. Again, this will depend on the outcome of the separation negotiations and new trade deals. Read about BREXIT Customs Union implications here.
Excise duties are set by the UK government. So there should be no change as a direct result of the UK leaving the EU.
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