Businesses must find clarity on the definitions of intermediaries, marketplaces, and presence, as they prepare for the EU’s project to modernise VAT, which will be introduced in July. While the UK and EU are introducing similar reforms to improve VAT process for MNEs, the six-month difference in timelines has caused problems for UK businesses, and complications arising from Brexit have exacerbated the situation.
“You have six months of, what do we do from January to July?” said Sandy Cochrane, VAT director at Mazars.
A combination of companies failing to prepare for Brexit, the late signing of the Trade and Cooperation Agreement (TCA) on December 24 2020, and timeline discrepancies on VAT reforms have forced UK businesses to make difficult decisions regarding their tax choices and supply chains.
The UK’s VAT reforms came in on January 1 2021 while the EU’s equivalent, the Modernising VAT for cross-border e-commerce reforms, are due on July 1. The EU’s changes include the launch of the One Stop Shop (OSS) for EU businesses and the Import One Stop Shop (IOSS) for non-EU companies.
The low-value import VAT exemption for goods worth less than €22 ($27) will also be withdrawn, and VAT will be charged at the point of sale for goods valued at under €150. The reform will make online marketplaces the deemed supplier for VAT purposes.
MNEs are welcoming the changes that will remove the time-intensive requirement for companies to register for VAT in multiple EU jurisdictions.
“One of our companies is registered in at least seven or eight different countries due to the supply chain,” said Artur Torres Pereira, European VAT manager at Klöckner Pentaplast. Although his company is B2B and therefore not affected by the reforms, Torres Pereira is looking forward to the day when the reforms are extended further.
“[The EU reforms are] one step closer to a much more efficient VAT system in the EU,” he said.
However, for UK businesses, the changes have come sooner than for their EU counterparts. The UK’s exit from the EU on January 1 2021, combined with the VAT reforms, has created confusion and difficulties for MNEs.
“I love the idea of having just one VAT return, but it’s not easy to get there,” said one tax director at a luxury goods MNE.
UK MNEs lose the EU distance selling threshold
One of the biggest problems for UK MNEs is the loss of the EU’s distance selling threshold simplification. Under this rule, EU sellers are required to register for VAT in another EU state only when they exceed the annual distance selling threshold for a specific country.
UK businesses lost this advantage after Brexit, but they are not able to use the EU’s IOSS until July. Companies may be forced to deal with the trade as an import into the EU, and Alan Pearce, VAT partner at Blick Rothenberg, said that if the product is worth more than €22, requirements could include a customs declaration, customs duty under EU tariff rules, and import VAT.
“It’s a massive amount of extra administration,” he added.
The other option for MNEs is to sell products at a price that does not include duty and taxes, which means the customer would receive a VAT and customs bill from the delivery agent. However, companies have reported negative experiences with customers who have been hit with an unexpected bill.
Some companies are using a third, hybrid system, in which a delivery agent pays the VAT on behalf of the customer and bills the supplier for it later. Most delivery agents will offer this service, but tax directors should be aware that they may require payment of the import duties in advance, depending on the relationship with the supplier.
Tax teams are looking forward to some consistency and simplification when the EU VAT reforms are introduced in the summer. In the meantime, there are plenty of issues for tax teams to consider.
Considerations for MNEs
EU tax law allows member states some freedom to determine their own rules, and some are likely to have more administrative requirements than others.
“There is a flexibility that could create more frustration, but it could also simplify things for businesses,” said Cochrane.
While all EU countries will require non-EU established businesses to appoint a local intermediary, some will require extra guarantees. However, countries with fewer extra requirements will have a competitive edge, and tax professionals told ITR that MNEs should consider this when deciding which EU state to register and file the IOSS.
“There’s a bit of country shopping to be done to strike the right balance between the commercial requirements and the administrative constraints of the EU member state concerned,” said Pearce.
Andy Spencer, director of consulting services at Sovos, also pointed out that the requirement for an intermediary is being interpreted differently by member states. In some, an intermediary is viewed as having joint liability with the taxpayer, but not in others.
This intersects with the Mutual Assistance Recovery Directive (MARD) which could mean that EU countries do not require a local and liable intermediary in order to do business, although some uncertainty remains. “That’s still in a state of flux but hopefully will be resolved fairly quickly,” said Spencer.
Tax advisors also told ITR that there is a risk of companies being categorised as a marketplace if they sell third-party goods, increasing their VAT liability. Spencer noted that the rules under the VAT reform are not yet fully clear. “The mechanisms are simpler, but complexity arises in who has liability to account for that VAT,” he said.
Finally, the luxury goods tax director said there is a question about how substantially present an MNE must be in the EU to qualify to use the OSS. “There is uncertainty as to what presence a non-union business would need to have,” they said.
Intersecting issues
The difficulty for tax directors at large MNEs appears to be balancing the uncertainties and demands of multiple events that have unfortunately coincided. The delays to Brexit, and then the late publication of the TCA, left many UK-EU businesses scrambling to solve customs and VAT problems.
At this time, businesses are dealing with the fallout of Brexit without benefitting from the simplifications offered by the EU’s VAT reforms. The risks are high and tax advisors have seen their billable hours spike in 2021 as MNEs seek clarity and reassurance.
Nonetheless, the questions are not purely fiscal. Tax professionals advised that MNEs should take a holistic view of the situation and weigh up commercial objectives in tandem with VAT considerations to achieve the best outcome.
