Brexit VAT implications: Withdrawal agreement vs no-deal outcomes

What Brexit VAT implications does your business need to be aware of? How businesses manage Value Added Tax (VAT) will radically change this year because of two events: the introduction of Making Tax Digital (MTD) and Brexit.

The former is a certainty and we have advice on what it means for your business, a checklist to help you get ready and more MTD advice articles to prepare your business.

The latter is less clear, even at this late stage, and how Brexit will affect businesses is still up for some debate.

This article covers what could happen to VAT post-Brexit and what the outcomes would mean for your business:

• How should your business handle VAT after Brexit?
• How will VAT change following Brexit?
• Business-to-business (B2B) supply of goods within the EU following Brexit
• B2B supply of services within the EU following Brexit
• Goods sent by post
• Other points to consider with VAT following a no-deal Brexit
• Conclusion on Brexit and VAT

How should your business handle VAT after Brexit?

As is widely known, Brexit is most likely to take one of two paths:

1. Withdrawal agreement

The UK government put the negotiated withdrawal agreement dated 25 November 2018 for a vote before the House of Commons in January 2019. It was roundly defeated.

The most likely path forward now is that the government will reformulate the agreement and try again.

Early on in the negotiations, the government and the EU made it clear that a withdrawal period, ending in December 2020, will follow the new Brexit date of 31 October 2019 (it was originally 29 March 2019). During this period, virtually everything will stay the same for businesses trading in the EU.

Meanwhile, negotiations will continue. But, in simple terms, there will be no immediate change to how businesses handle UK VAT or customs duty and procedures in relation to dispatches or arrivals from EU countries.

It’s worth remembering that any other outcome aside from the withdrawal agreement or no-deal Brexit is pure speculation at this point, as is any discussion about extending Article 50.

2. No-deal (hard) Brexit

Although the UK government and the European Union (EU) have both stated this isn’t their desired goal, this is the outcome for which most preparation has been undertaken by governments, industry and retailers.

Both the UK and the EU have published significant amounts of documentation about what will happen to existing laws, procedures and governing bodies following a no-deal Brexit.

Meanwhile, some large retailers are stockpiling goods within warehousing to provide a buffer stock in case of a potential blockage at ports caused by new VAT and customs administration, while manufacturers are accessing their capabilities in a post-Brexit world where concepts such as just-in-time manufacturing will become more difficult.

How will VAT change after Brexit?

The UK VAT technical notice discusses the UK’s plans to reintroduce postponed VAT accounting in the event of a no-deal. This will impact all businesses that import goods into the UK or export goods out of the UK (i.e. has a wider scope than just UK-EU trade).

And due to Making Tax Digital for VAT and its requirement that businesses use functional compatible software, this may mean businesses will need to update the software they use to generate their UK VAT return.

Conversely, the withdrawal agreement of 25 November 2018 makes little reference to VAT and the acronym appears fewer than 40 times across its entire 854 pages.

The most pertinent reference is simply in relation to what happens to goods travelling across borders when the withdrawal period ends, at which point the existing rules continue to apply for five years for that transaction.

Other mentions of VAT within the withdrawal agreement relate to the armed forces in Cyprus, or appear only when describing the technology by which the UK and EU will share VAT information following Brexit in order to facilitate administration.

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 EU.

However, other documents from both the UK and EU allow us to make some educated guesses as to what the situation is likely to be following the end of the withdrawal period in December 2020.

Regardless of all that, however, here’s the good news: domestic VAT within the UK is unlikely to change following Brexit, which is to say, there’s should be nothing in the Brexit decisions that mean it has to change for purely domestic businesses. VAT rates are also unlikely to change.

However, the end result of Brexit is ultimately the same if we have a negotiated withdrawal or a no-deal outcome: sending or receiving goods to and from the UK’s EU neighbours will change to some degree, at whichever point—whether that’s immediately following Brexit in a no-deal scenario, or as of December 2020 if a withdrawal agreement is implemented.

Below is the shape this is likely to take. Note that we fill in some gaps in the body of knowledge with our own predictions and we provide no guarantees as to accuracy.

Read more about Brexit:

• A guide on preparing for Brexit in case of a no deal
• No-deal Brexit: What your business needs to consider and plan
• Brexit impact on business: Four challenges to tackle
• How will Brexit affect businesses? 12 things you need to know
• Brexit jargon buster: Key phrases for your business to understand

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Business-to-business (B2B) supply of goods within the EU following Brexit

At present, business-to-business (B2B) supplies of goods, where the vendor and customer are in different Member States of the EU and are both VAT registered, has a VAT accounting impact but no cash flow impact.

B2B sales are typically invoiced by the EU VAT registered supplier at zero rate. The customer then accounts for the purchase at the local VAT rate directly on their VAT return.

If there’s a deal

Unless there’s an agreement to the contrary before the end of the transition period, VAT-registered businesses that 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 put in place to make this easier for business, in terms of immediate cash flow or administrative costs, although it seems reasonable to anticipate this.

No deal

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

However, UK-based businesses importing into the UK (including from the EU) will use Postponed Accounting to avoid this cash flow impact.

This will mean VAT-registered businesses will be able to account for import VAT in their VAT return, rather than paying it as the goods arrive at the UK border. This should ease some of the administrative burden although could require additional record keeping.

B2B supply of services within the EU following Brexit

This refers to B2B supplies of services in which the vendor and customer are in different member states (such as France and the UK), and are both VAT registered, or the vendor is from outside the EU and the EU customer is VAT registered are normally invoiced without VAT (i.e. invoiced gross).

Currently, the customer must account for the VAT on both the purchase and the sale (known as reverse charge rules) and then pay any VAT due.

If there’s a deal

Unless there’s an agreement to the contrary before the end of the withdrawal period, EU VAT-registered businesses that purchase services from the UK will need to account for VAT via the reverse charge mechanism.

It’s likely the UK will require UK VAT-registered businesses to apply the reverse charge mechanism to all non-UK purchases of services (including those provided from the EU).

No deal

It’s likely the outcome will be the same as if there’s a deal (but beginning as of the Brexit date of 31 October 2019).

Goods sent by post

The UK and many other countries currently operate a Low Value Consignment Relief (LVCR) scheme that means VAT isn’t applied to goods sent to the UK as parcels with a declared value below £15.

If there’s a 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 indicated that LVCR will be withdrawn prior to Brexit but 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 that they pay the VAT as required via the postal operator being used.

Notably, these new rules cover all parcels that 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 £1,000 fine.

No deal

This will be the same as if there’s a deal because LVCR is being withdrawn in any event.

Other points to consider with VAT following a no-deal Brexit

For those 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 government promises more information on this in due course.

Those 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, something that can only be done post-Brexit, or 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 that are currently applied to non-EU businesses. How to claim VAT refunds varies across the EU, so there will be varying administrative requirements.

Conclusion on Brexit and VAT

Life is going to get more complicated for businesses following Brexit, regardless of what happens, but don’t forget that these changes will soon become a routine part of business administration.

Former US politician Donald Rumsfeld perfectly summed-up business preparations for Brexit nearly two decades ago, even though he was talking about the Iraq war and Brexit wasn’t even a concept:

“There are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns—the ones we don’t know we don’t know.”

Preparing for Brexit at this stage is all about knowing what’s known, while also bearing in mind the known unknowns. Above all, you should keep a realistic view of what’s happening, and make reasonable preparations for the eventualities that are being discussed.

Doing this right now could make all the difference for your business in the years to come.

Note: This article has been updated due to the extension to Brexit, with the UK due to leave the EU on 31 October 2019.