Brace for Brexit 12: EU simplifications
Jason Croke considers the loss of VAT simplifications that we have taken for granted while the UK was an EU member, but which will no longer be available to businesses from 1 January 2021.
Take the situation of a UK business which sells buckets. It doesn’t manufacture them; it orders them from a specialist manufacturer in France. The UK business orders stock for its UK warehouse, the French supplier ships to the UK and the UK business sells the stock to UK customers.
Pre-Brexit that would have been an intra-EU supply, the French supplier zero-rates and the UK customer accounts for VAT on their VAT return. Post Brexit, this will be a zero-rated export and either seller or buyer is responsible for import VAT and import duty.
But what if the UK bucket supplier takes an order from a German business customer? Rather than order from France, to ship the buckets to UK, only to onward ship to Germany, it would make sense (and save money) to ship the goods from France to Germany. Pre-Brexit this transaction would have operated under triangulation.
The place of supply of goods rules tell us that the place of supply is where the goods are at the time of sale, so in the above scenario, the UK business takes ownership of the goods in France and the French supplier ships them to Germany on behalf of the UK supplier. As all three parties in this transaction are in the EU and are also all VAT registered in their respective member states, then triangulation rule allows the UK to make a supply without registering for VAT in France or Germany.
The diagram is taken from HMRC’s internal guidance at VATPOSG3830 and is one of several scenarios where three parties supply or purchase from each other.
The supplier in France (A), ships goods to Germany (B) via the intermediary (B) in the UK
After the end of the Brexit transition period, because the UK supplier is no longer in the EU, the triangulation simplification is not available.
Reverting to the normal rules and using our earlier example, the UK takes ownership of the goods in Germany (customer destination) and so the UK supplier needs to register for VAT in Germany. This could catch out both UK and EU suppliers, and businesses need to review their supply chains to see if this impacts them.
Call off stock
This applies where a UK supplier has stock which is under the control of the customer (e.g., UK supplier ships stock to a major Italian customer who has access to stock at all times), the UK seller ships the goods to Italy and “calls off” the stock when required. The tax point can be either the initial movement of goods from UK to Italy, or can be as and when the goods are used (called off) by the Italian customer.
Post Brexit, call off stock will no longer be an intra-EU movement of goods, it will be a UK export into Italy. The UK supplier will likely need to register for VAT in Italy and account for Italian VAT each time the Italian customer “calls off” stock.
Tour Operator Margin Scheme (TOMS)
TOMS negates the need for an EU supplier to register for VAT in every EU member state. In simple terms, where the conditions are met, output tax is calculated on the VAT inclusive cost of the event or holiday and the price paid by the customer, that margin VAT being declared to the seller’s domestic VAT authority.
Post Brexit, TOMS – or at least a UK version of it – would still apply to sales made in the UK by UK sellers, sales outside of the UK (which will include the EU from January 20210) will remain zero rated. A UK supplier, post Brexit, will zero rate any part of a European holiday or event. The EU laws are such that a non-EU supplier does not have to register for VAT in the EU and from January 2021, the UK will not be an EU supplier.
This situation may be changes by the EU, as there may be an opportunity for EU based tour operators to fall outside of the EU TOMS by trading from the UK. It all remains very uncertain. In theory, the loss of the “simplification” that is TOMS, would mean a UK tour operator having to register for VAT in every EU member state it does business in and likewise an EU tour operator having to register for UK VAT.
Some uncertainty remains around TOMS, but businesses need to urgently review the impact that the loss of all these simplifications may have on their business. For example, where the business currently has call off stock it may need to consider what happens in January 2021.
Consider the cost of an EU VAT registration, if only to protect the UK business’ position post Brexit. The business can always deregister for EU VAT if a deal is struck, but the risk of waiting might be that is it not possible to obtain an EU VAT number in time for 1 January 2021, and that may mean the business cannot operate as smoothly as before.
That warning is not meant to scare or to generate sales for accountants, but if a business is using simplifications, consider what impact Brexit could have on that business. If registering for VAT in Italy or Germany reduces the business risks, then the cost of registering (and deregistering if no longer needed) is a small cost to protect the business from a potential risk.
Any business which makes use of these EU simplifications should review their supply chains, and check the impact of losing these simplifications.
This article was updated on 3 December to amend the mislabelled triangulation diagram.
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Jason has over 20 years’ experience working exclusively in indirect taxes (VAT, import duty, SDLT) with owner-managed businesses, corporates and not for profit sectors. He particularly enjoys challenging HMRC decisions, representing clients in tribunals or during inspections.
Experience includes land and property, partial exemption and...