Brexit through a VAT and customs perspective
Daan Arends and Wouter Kolkman of DLA Piper Netherlands discuss how the United Kingdom’s exit from the European Union will impact existing tax laws related to VAT and customs.
The United Kingdom formally left the European Union on January 31 2020. In practice, this succession colloquially known as ‘Brexit’, will not to some extent, come to pass until the end of 2020. This article sets out what businesses and taxpayers can expect in the Brexit transitional period and looks at the subsequent potential VAT and customs issues which should be take into consideration when making preparations.
Following Brexit, a pre-determined transition period started immediately pursuant to the Withdrawal Agreement, which is set to end on December 31 2020.
During the transition period, EU law (Union law) shall be applicable to and in the UK, though the UK will no longer be represented in the EU institutions. The period aims, inter alia, for the governments concerned to negotiate a future partnership and for businesses to make preparations.
Although the relevant parties could extend the period for a further two years, UK Prime Minister Boris Johnson has said he is reluctant to ask for an extension. Hence, below it is assumed that no extension will be agreed and - given the relative short timeframe – that no deal with respect to VAT nor customs (e.g., free trade agreement) is reached before the end of 2020.
Imports and exports
In principle, the taxes most affected by Brexit are those governed by rules positively imposed at EU level: customs legislations (where the UK currently has no legislation of its own), VAT, and certain information sharing rules. After the transition period, supplies of goods between the UK and EU will be considered imports and exports for customs purposes.
UK businesses should obtain an EU Economic Operators Registration and Identification (EORI) number in order to trade in goods with the EU, and vice versa. Importations may be subject to customs duties and customs procedures whereas at present no such (administrative or monetary) barriers exists. Businesses should collect and assign tariff classification codes. Also, the appointment of a customs agent may be required in order for a UK business, without any establishment for customs purposes in the EU, to act as declarant (the person lodging the customs declaration, in some ways similar to an importer of record).
VAT – supplying goods
From a VAT perspective, supplies between the UK and the EU would no longer constitute intra-Community supplies, which means there would no longer be Intrastat and European Commission (EC) sales listings. The UK will no longer be able to take advantage of the EU distance selling regime. Furthermore, some EU member states require the appointment of a fiscal representative in order to meet local rules.
VAT – supplying services
Many UK and non-EU businesses alike are currently using the UK Mini One Stop Shop (MOSS) scheme to declare and remit VAT on telecommunications, broadcasting and electronic (TBE) services. These businesses would need to register for VAT in the EU to continue to take advantage of the MOSS.
Interpretation of (former) EU law
Currently, the European Court of Justice (ECJ) interprets the EU law and ensures its equal application across all EU member states – including the UK. In late January 2020, The Times reported, based on a leaked diplomatic document, that the EU is preparing to demand that the ECJ is able to continue enforcing rules on trade, fishing and security even after the transition period. At the time of this article, it is unclear to what extent ECJ (past or future) rulings will be enforced following the transition period.
Furthermore, the UK may introduce new VAT legislation and customs legislations (which, they currently do not have) which differs from the EU legislative framework. For VAT, the UK may decide to lower its VAT rates in favour of increasing trade/spending (it is currently limited to go below a certain threshold) or set favourable (reduced) VAT rates on certain goods or services.
The current EU and UK VAT legislation provides for a VAT recovery right where financial services are provided to non-EU established recipients. Where such services are provided to EU established recipients, no such right exists. Following the transition period, this means that, for example, EU banks and insurance companies doing business with UK established customers, will be able to recover their attributable input VAT. This would be just as the institutions can do with customers based outside the EU. The same is envisaged to hold true for their UK counterparts doing business with EU established customers.
Brexit is expected to, in large part, impact UK-centered supply chains. This would apply whether an EU business is trading with/in the UK or where a UK business is conducting business in the EU. Particularly with respect to customs duties, formalities and registrations are likely to increase the burden on businesses and are likely to cause delays. On a positive note, it is envisaged that certain UK/EU customs arrangement may be put in place which would reduce the aforementioned burden and delays.
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