Richard Asquith spells out the possible timetable for when the UK becomes a third country with regard to the EU VAT regime.
When the UK leaves the EU VAT regime on Brexit, an estimated 132,000 UK companies, and many more EU businesses trading with the UK, may lose many of the VAT reporting simplifications and cash flow advantages. The main changes for UK companies after will include:
Distance selling registration threshold
An estimated 27,000 online retailers currently sell goods to EU consumers through their UK VAT number under the distance selling thresholds. These thresholds would not be available after Brexit, and so those companies would have to register for VAT in each country within the EU or cease to sell in that country.
UK import VAT and duties
Currently, business to business (B2B) purchases of goods bought from the EU are zero-rated for VAT and there are no duties due. After Brexit, there will be an obligation to pay VAT, generally at 20%, on any goods bought from the rest of the EU. However, the UK may introduce a VAT deferment scheme, which would eliminate the cash payment of the import VAT. Any sales of UK to goods to the other EU states would also in future attract import VAT in the countries of the customers.
Since 2015, sellers of electronic services (eg streaming media, games, apps, e-books) to consumers have been able to report all their EU sales via a single return to HMRC under the VAT MOSS rules. After Brexit, such businesses would have to complete a new registration in one of the remaining EU states (possibly Ireland) to continue to take advantage of this simplification.
Where a UK company registers for VAT in 19 of the remaining 27 EU member states, it will require a special type of local VAT agent. This ‘fiscal representative’ is jointly liable for any unpaid VAT, so typical demands high compliance fees and a bank guarantees from the trader.
When will these changes take effect?
The date for these significant changes to kick in is still uncertain as the UK’s withdrawal talks proceed. Below are six scenarios and dates for this momentous tax overhaul.
- 29 March 2019: Hard Brexit
On 29 March 2019, the UK is set to leave the European Union by operation of the law. This follows the UK’s triggering of Article 50 of the Lisbon Treaty on 29 March 2017, which started a two-year exit timetable. Since no withdrawal agreement has yet been agreed – meaning a ‘Hard Brexit’ – this is the current departure date for the UK leaving the EU VAT system.
- 31 December 2020: EU’s transition offer
The EU has offered the UK a 21-month transition period following the 29 March 2019 Brexit date. During this time, the UK will still remain within the EU VAT regime, including having to accept rule changes and still being subject to rulings of the European Court of Justice. The 31 December 2020 date was set by the EU to coincide with the ending of its five-year budgetary cycle.
- 29 March 2021: UK’s transition offer
Last year, the UK’s Conservative government requested a two year transition period following Brexit. This means an exit date of 29 March 2021. Until this date, the UK will still be trading within the EU indirect tax system, see above.
- 22 November 2022: UK Finance Act
The EU has plans to introduce a Common EU VAT regime in 2022. If the UK is still in the EU VAT regime at this point, it would have to decide whether to join the new regime. If it doesn’t, and the UK left at this point, this would be crystallised in the Finance Act 2022, which generally receives Royal Assent around the 22 November each year.
- 29 March 2023: Implementation extension
The discussions around a two year transition period overlook the fact that, since the future trading relationship with the EU won’t be known when it starts, UK and EU companies cannot in fact transition to the new trade rules. The transition will therefore in effect be a standstill period. This implies that a real, further two year implementation period will be required to allow businesses to shift to the eventual new trading rules.
- Never: Reversal of the June 2016 referendum result
An unlikely event. But, for example, if the UK government loses the Autumn 2018 Withdrawal Bill vote by a Labour opposition and Tories rebel defeat, then a second referendum could be called. In this case, the EU would be likely to permit an Article 50 extension to allow time for that vote. In the event of a “remain” decision second time around, then the UK would remain within the EU and within the EU VAT system.
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Richard Asquith is the VP of Global Indirect Tax at Avalara, a global transaction tax technology company. He leads Avalara’s outsourced international VAT compliance service. Richard originally qualified at KPMG in the UK, and then spent over ten years with EY in Hungary, Russia and France.