Brexit: VAT implications for businesses

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If the UK does not agree to a formal withdrawal agreement by 29 March 2019 then its status under EU law would change from that of an EU Member State of the European Union to that of a third country. The consequences of this change would result in the UK being outside of the Single Market and Customs Union and have no trade or cooperation agreements in place with the EU.

There would be no transition period in which businesses can complete the necessary changes to accounting systems, compliance reporting and provide for the associated costs in adjusting to a new trading arrangement. Things will happen quickly.

Planning and managing for change is a difficult task in its own right but, where you do not know what to plan for, you need to garner specialist input to guide you through the turmoil and ensure that what measures you can take will protect your business and ensure compliance practices are adhered to. The VAT Practice can provide this specialist input with its experience and expertise in both Irish and UK VAT assisting businesses in transitioning their VAT reporting and compliance management requirements through any required changes.

We cannot predict the outcome and, it may be the case that what I write now is unnecessary but, better to consider the worst case scenario and their consequences than ignore; regardless of how the UK leave, it should be clear that they are leaving the EU and there will be changes come what may given that leaving means leaving the current EU trade arrangements and facilities provided for under the Single and Customs Union. If the UK does leave without a withdrawal agreement in place here are some useful scenarios outlining the main VAT issues that may arise for Irish and UK businesses in the event of a hard Brexit.

Irish business supplies goods from Ireland to UK business customer:  

• The supply is no longer treated as an intra-EU dispatch of goods with VAT accounted for under the reverse charge accounting procedure.

• The supply remains zero-rated for VAT in Ireland though as an export of goods.

• The Irish supplier is no longer required to complete Intrastat and VIES declarations.

• The Irish business will have to initiate changes to its systems to enable application of the appropriate Customs declaration procedures.

• The supply will be an import of goods for the UK customer.

• Customs duty tariffs and import VAT will apply (Note the UK government has confirmed that it will introduce postponed accounting for import VAT as a measure to alleviate cash flow issues for UK businesses suddenly placed in an importer position).

An interesting footnote for supplies of goods to UK businesses where the items are small and sent by parcel – HMRC has confirmed that Low Value Consignment Relief will not be extended to parcels arriving into the UK from the EU thereby being subject to UK VAT, this VAT liability rests with the supplier and may result in additional administrative requirements for Irish businesses whereby they are required to register with HMRC to facilitate collection of the VAT due. It is understood that this process may be value based and only apply to parcels with a value of less than £135.

Irish business supplying goods to UK customers under a consignment stock arrangement, stock held in the UK

• The use of consignment stock schemes can negate the requirement for the supplier to register for VAT in the EU Member State where the stock is held.

• This concession will not apply under a hard Brexit.

• The Irish business will be required to register for UK VAT in order to manage the holding of stock in the UK.

• This will also create a self supply export of goods from Ireland.

• This will result in a self supply import of goods in the UK and result in additional costs in Customs Tariffs – Note the current EU Tariffs may no longer apply and tariffs may be calculated at WTO levels.

• The Irish business will incur additional costs in both administering the UK VAT registration, managing the import of the goods and the associated customs tariffs.

Irish business supplying goods to a German customer, product sourced from a UK third party supplier

• Under current  EU VAT regulations businesses in the EU can avail of the Triangulation Simplification procedure whereby the supplier is not required to register for VAT in either the customers’ EUMS or the EUMS from where the product is sourced.

• As the UK will no longer be a member of the Single Market then Triangulation can no longer apply.

• The Irish business will be required to register for VAT either in the UK or Germany.

• If the UK, then the onward supply to the German customer will be a zero-rated export BUT the German customer will incur additional costs in administering the importation of the goods and customs tariffs.

• Where the Irish business elects to register in Germany then it will bear the additional import costs thereby impacting on its margin.

Businesses selling goods to consumers under the Distance selling regime

• With the UK no longer being a part of the EU then, the Distance selling regime no longer applies.

• The Irish business selling goods to UK consumers would no longer account for Irish VAT on the supply.

• There would be no requirement for the Irish business to register for VAT in the UK as there is no registration threshold to consider.

• Any Irish businesses currently registered for VAT in the UK under the Distance selling regime could cancel its UK VAT registration with immediate effect.

• A UK business selling goods to Irish consumers though can zero-rate the sale as it is treated as an import of goods into the EU.

• These sales will also be liable to import VAT and customs tariffs which either the UK supplier or Irish customer will be required to pay depending on how the goods are sold; this could make the purchase more expensive for the customer as they will be an additional, non refundable cost to the customer.

An important point to note for Distance sales is that the VAT treatment is determined NOT by where the business is established BUT where the goods are located when the sale is made.

Therefore, Irish businesses selling goods to consumers using fulfilment centres need to be registered for VAT where the fulfilment centre is.

UK business supplying goods to an Irish business

• The supply is no longer treated as an intra-EU dispatch of goods.

• There is no requirement to complete Intrastat/VIES declarations.

• The supply is now an export of goods to Ireland.

• The Irish business will be required to import the goods which will be subject to import VAT and customs duty tariffs.

The Government has announced a VAT measure whereby a system of postponed accounting for import VAT for the immediate period following Brexit. The continued use of this system will be subject to Revenue approval, we assume on a case by case basis. The customs tariff will provide for an additional cost to Irish businesses bringing in goods from the UK. Although the postponed accounting system measure is welcomed, the fact that it will, in effect, be in place as a short term measure is disappointing.

UK motor dealer selling second hand vehicles to an Irish motor dealer

• As with supplies of goods, the motor vehicle will become an importation of goods into Ireland.

• This will apply to both new and used vehicles, both qualifying and margin scheme.

• In all cases, the cost of the purchase to the Irish dealer will increase as the car will be subject to both import VAT, recoverable, and customs duty, not recoverable.

The above scenarios cover some of the VAT implications facing Irish and UK businesses where a no deal Brexit to occur. There will be an impact in other specific areas such as the travel sector where it remains unclear whether the Tour Operator’s Margin scheme would remain. Suppliers of digital services to consumers will also face issues in the application of MOSS as the supplier’s status may change.

Distance sellers may also need to consider the impact of a no deal Brexit to their current basis of operation where they supply Irish consumers form the UK and vice versa. With the possible additional cost in customs tariffs and VAT the cost to the consumer will increase which could result in a negative impact to the supplier’s competitive edge.

“Where do I sell from?” may become the standard question in order to consider how best to minimise additional costs to a business and its customer’s where the supply changes from intra-EU/EU Distance sales to export/import and customs tariffs.

The VAT Practice understands that uncertainty does not facilitate an easy route to planning and managing change and, consideration needs to be given in contemplating any operational changes in relation to cost, day to day practicalities and adherence to compliance and reporting obligations against risk in increased cost of sale, additional irrecoverable costs and, potential risk to the business for failures in compliance.

At this juncture, digging ones head in the sand is not the answer rather, the most optimum route forward is to avail of expert advice to assess, identify and summarise in a clear and simple way how your business’ VAT trading structure may change, what pitfalls and opportunities this presents and, what actions are required to maximise a positive reaction to these changes; by doing so, a business will be well placed to take any appropriate action required. 

The VAT Practice can assist business in preparing for Brexit, for more information on the servces we can provide then please contact us at [email protected]

About [email protected] VAT Practice

About Nick@The VAT Practice

Nicholas Ryan the principal of The VAT Practice has over 29 years experience as a VAT specialist building up an extensive knowledge and understanding of Irish, UK and international VAT. 

Nick started his career with HM Revenue & Customs as a VAT control officer, it was his interest in how businesses manage their operations and his desire to work more closely with businesses in managing their VAT affairs that lead him to move into the private sector. 

Nick has worked for a number of the Big 4 practices both in Ireland and the UK. Since his move to Ireland in 2002 Nick was Director of VAT for PricewaterhouseCoopers in their Cork office and, prior to this, head of VAT services for the Munster Region for Ernst & Young. During his career in the UK Nick also worked for PricewaterhouseCoopers and was a part of the VAT leasing team at KPMG. 

During his career he has worked with a wide range of clients including Plc’s, owner managed businesses, sme’s and not for profit organizations. He has advised these clients on a broad spectrum of VAT issues from multi territory transactions, cross border and domestic issues, managing Revenue audits, compliance and risk management issues and the application of VAT to specific transactions or industry sectors.

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