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UK EU Withdrawal Agreement and VAT

  • Nov 20, 2018 | Richard Asquith

The UK government has approved the draft EU Withdrawal Agreement (‘WA’) and Political Declaration, negotiated with representatives of the EU27.

Transition exit till Dec 2020 or Dec 2022

The Withdrawal Agreement (WA) provides for the UK entering a 21-month transition period with the EU after 29 March 2019, the date set of the UK’s formal exit from the EU. This will enable the UK and EU to negotiate a Free Trade Agreement (FTA) which will set out the terms of future trade between the two after the transition period. If the WA is confirmed (see below), the UK will remain inside the EU Single Market, Customs Union (CU) and other EU structures, institutions and agreements until December 2020. This includes the UK remaining part of the EU VAT regime until the end of 2020. However, the UK will lose its seat at the EU Council, Commission, European Court of Justice and MEPs at the EU Parliament. The UK would have to continue contributing to some part of the EU budget during this transition period.

The EU has also offered that this 21-month transition may be extended for a further 2 years if no FTA is concluded by the end of 2020. This would extend the UK being inside the EU institutions and VAT regime until December 2022.

Northern Ireland backstop extended to rest of UK

In the event of no deal at the end of 2020, which prevents a hard border between Northern Ireland and Ireland, then a backstop consisting of a single custom territory between the EU and the UK will be triggered. As a result, Northern Ireland will be in a deeper customs relationship with the EU27 than the rest of the UK, including being more closely aligned with the rules of the EU Single Market.

Whilst Nothern Ireland is tied to the CU, the UK will be blocked from significantly changing rules in other parts of the country to give them a competitive advantage over the rest of the EU.  The UK may not unilaterally leave the single customs territory; it must seek agreement with the EU.

Next steps to pass the Withdrawal Agreement and avoid ‘no-deal’ Brexit

The agreement will next be reviewed by the EU27 states, before formal acceptance at an EU leaders’ summit at the end of November. Acceptance will be on a unanimous vote only. The EU parliament must then vote to ratify the agreement on a majority basis. Lastly, the UK Parliament will vote on the agreement.

VAT and the Brexit Withdrawal Agreement

The UK will remain inside the EU VAT regime until the end of the December 2020 transition period. Key VAT-issues raised by the agreement include:

  • The EU VAT Directive in respect of intra-community supplies between the EU and UK will remain in force until the end of December 2020. The rights and obligations relating to any transaction occurring up to the end of the transition will apply until the end of 2025
  • The European Court of Justice may still hear cases until December 2024 concerning any UK infringement of the VAT Directive up to December 2020
  • The last EU MOSS VAT returns covering sales to EU consumers of digital services to the end of the transition period must be submitted by UK registered taxpayers by 31 December 2021
  • Access to the VAT Return IT systems, by the United Kingdom and the Member States with reciprocal access, to:
    • Exchange MOSS return information, for returns submitted before or on
      31 January 2021;
    • Exchange amendments relating to MOSS VAT returns submitted before or on
      20 January 2021;
    • Exchange VAT return information for transactions where the other party is involved;
    • The United Kingdom and the Member States shall have no access to each other's VAT return information of transactions that take place after
      31 December 2020.
  • Any post-return adjustments to VAT returns filed in another EU country by a UK-resident tax payer may be submitted December 2021
  • UK taxpayers may continue to benefit from the 8th Directive VAT recovery system for VAT incurred in the EU27 until the end of 2020. Any last final claims must be submitted by 31 March 2021
  • The UK and EU27 will continue to exchange information and co-operate on combating VAT and duties fraud under the current terms until the end of 2024
  • Ending of the UK participation in the EU VAT Information Exchange System on 31 December 2020 for future registrations. Although historical information will be retained until December 2024, and this will include deregistration updates of any UK VAT payers recorded prior to the end of the transition

Need help with your UK VAT compliance?

Researching UK VAT legislation is the first step to understanding your VAT compliance needs. Avalara has a range of solutions that can help your business depending on where and how you trade. 

VP Global Indirect Tax
Richard Asquith
VP Global Indirect Tax Richard Asquith
Richard Asquith is the former VP Global Indirect Tax at Avalara