UK to leave EU VAT regime 31 Dec 2020
- Dec 13, 2019 | Richard Asquith
Following UK Conservative national election win on 12 December 2019, it looks certain that the UK will push ahead with the Withdrawal Agreement (‘WA’) plan to exit the European Union on the 31 January 2020.
Northern Ireland Brexit VAT regime will take-up a special dual position.
31 Dec 2020 exit from EU VAT regime, Customs Union and Single Market
Under the terms of the WA, the UK will have an exit transition period until 31 December 2020. Until this time, the UK will remain within the EU VAT regime, Single Market and Customs Union.
The UK will continue to apply EU law during this period, with a few exceptions, as if it were a Member State. But the UK will have no institutional representation and no role in decision-making. The EU institutions and other bodies, offices and agencies will continue to exercise their powers under EU law in relation to the UK. The CJEU will have jurisdiction in relation to the UK and to the interpretation and application of the Withdrawal Agreement.
The UK will leave the EU VAT regime on 31 December 2020. Within the WA is a provision to potentially extend this to up to two years until the end of 2022 as a 'implementation period'. However, politically, the new government may choose for a clean break at the end of 2020.
During the implementation period, the EU and UK will seek to negotiate a Free Trade Agreement. This will include future tariffs and customs controls on the movements of goods (see below). However, this will not materially affect the post-2020 VAT changes, below. The UK will become a 'third country' for the purposes of EU VAT.
You can download Avalara's detailed Brexit VAT and Customs guide here. This covers all VAT and customs changes.
Brexit VAT Changes
The major changes for UK and EU businesses upon the UK leaving the VAT regime include:
- The UK will no longer have to assume the EU VAT Directive rules into its own VAT Act. For example, it will no longer have to maintain a minimum VAT rate of 15%. However, since its VAT rate is 20%, and the consumption tax accounts for almost a third of tax revenues, any reduction is highly unlikely.
- The UK will have complete control over its reduced VAT rates, which are currently restricted within the rules of the EU VAT Directive. Although this may be a moot point from 2022 as the EU states have agreed that they will enjoy full rate setting powers.
- The ending of zero-rated B2B intra-community supplies; all movements will become imports or exports, subject to UK or EU import VAT.
- By way of compensation, the UK will introduce a Postponed Accounting import VAT deferral scheme so no cash VAT payment has to be made by business importers to UK customs. However, many EU countries do not offer the same scheme for UK businesses importing their goods.
- The loss of Distance Selling thresholds for UK e-commerce sellers of goods to EU consumers. Goods will now be subject to import VAT, and UK sellers will have to consider VAT registering in Europe immediately. Similarly, EU e-commerce sellers may now need to register immediately for UK VAT if they have been selling to UK consumers under the £70,000 threshold.
- Any UK business with a foreign VAT registration in the EU may now face the obligation to appoint a special VAT fiscal representative. This applies in 19 of the 27 EU states. These agents hold direct liablity for any unpaid VAT, and therefore require cash deposits or bank guarantees in exchange.
- The scrapping of the UK £15 low-value consignment stock relief which exempts imports of goods (including from the rest of EU after Brexit) from VAT. Instead, for goods at £135 or below, sellers or their postal service will have to declare and pay to HMRC via a new, quarterly filing, VAT charged at the point-of-sale.
- For UK sellers of digital services to EU consumers, the UK will no longer be a member of the EU Mini One-Stop-Shop single VAT return scheme. UK sellers of electronic, broadcast or telecoms services to consumers will therefore have register in any other EU state, as a non-Union businesses, to continue to file their VAT declarations for EU e-service sales. EU sellers into the UK will have register with the UK’s HMRC for the same declaration. Any non-EU business which used the UK MOSS registration will have to reregister for MOSS in the EU and separately in the UK under a regular VAT return.
- There will be limted changes on the VAT on services for B2B transactions after the UK leaves the EU VAT regime. The reverse charge will still apply. in the future, the UK may deviate from some of the use and enjoyment rules.
- UK businesses incurring EU VAT on travel, hotel or other expenses will no longer be able to use the 8thDirective online VAT reclaim system operated via HMRC. Instead, they will use the 13th Directive paper-based reclaim process. This requires individual claims to each country where there is a VAT claim. Last UK claims via the 8th Directive will be for the final quarter of 2020.
- As part of the WA, Northern Ireland (NI) will enter into a special VAT and customs relationship with the EU. Whilst NI will remain within the UK VAT area, it will track EU rules, including zero-rating for VAT on intra-community supplies across the Irish border. EU VAT on imports into Ireland via Northern Ireland will be collected by the UK authorities.
Leaving the EU Customs Union
The UK will also likely exit the EU Customs Union at the end of 2020. This was established to remove tariffs and declarations on goods moving between member states. As a result, all goods moving between the UK and EU will require customs declarations and be subject to tariffs. The details of this will be negotiated between now and the 31 December 2020 as the EU and UK seek to strike a Free Trade Agreement.
As a default position, the EU will have to impose 'most favoured nation' tariff rates set by the World Trade Organsiation. The UK has already stated that it will make 87% of goods import tariff-free. This includes goods coming from the EU and the rest of the world.
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.