The Meaning of Brexit for VAT
Key questions facing international e-commerce businesses and the potential impact of Brexit on VAT.
For e-commerce retailers globally, Brexit poses many unanswered questions. This article looks at how VAT and trade could be affected following the exit from the European Union.
Where did the UK’s part in the European Union Begin?
- The UK joined the European Union on 1st January 1973 alongside Ireland and Denmark.
- The European single market was established in 1993 paving the way for the free movement of goods, capital, services and people across all member states.
- When the UK joined the European Union, they were obligated to introduce VAT.
- Value Added Tax was introduced to reduce the distortion of export refunds.
- VAT in Europe is used and operates within the EU VAT directive with the exception of states such as Monaco and San Marino.
The European Union – Where is the UK now?
Since the United Kingdom joined the European Union in 1973 there is no doubt the EU has contributed to increased trade . Currently, as an e-commerce business, the following applies when trading goods cross-border:
- Part of the EU single market – no tariffs, quotas or taxes on trade
- Part of the EU VAT bloc
- Free movement of goods, services, capital and people
- Removal of ‘non-tariff barriers’ – the same rules apply on packaging, safety regulations and standards apply across the EU
- Business to Business = Intra community transactions
- Set to join the EU Vat regulations which come into force fully in 2021 called ‘Making Tax Digital’
Brexit – Where are we going?
There will either be a deal, a no deal or another referendum.
What could this mean for e-commerce and VAT? The main questions facing businesses from a VAT perspective:
- Will VAT be collected at the border after Brexit?
- Will there be a change in the VAT rate in the UK?
- Will there be any benefits when trading cross-border if the UK leaves the EU?
- How are digital services affected?
- Will VAT be scrapped by the UK following Brexit?
- How can my e-commerce business prepare if I trade cross-border?
- Will online marketplaces change the options for sellers trading in the UK?
Currently, many of these questions are currently impossible to answer accurately, due to the lack of clarity on the final outcome of Brexit.
However, on the 23rd August 2018 the UK government released a No deal paper outlining the potential scenarios facing the exit from the EU.
Furthermore, the potential outcomes post-Brexit are still unknown and the impact on trade of goods and services across the European Union just speculation.
According to The Financial Times, ‘The revenue losses have the potential to be large if the UK does not collect taxes at the border. In a “no deal” Brexit, value added tax liabilities on imports would need to be administered at the border because the UK would lose access to the EU’s VAT information sharing mechanisms. ‘
If there is a NO DEAL the government has proposed the following for a post VAT Brexit, which would take effect from the 29th March 2019:
- The UK will continue to have a VAT system
- If UK businesses are storing goods in EU member states (i.e. a fulfilment centre) they will be treated under the same rules as a non-EU business and you would need to register for VAT in that EU member state
- Distance selling rules will no longer apply to the UK and businesses trading goods to consumers will be treated as the rest of the world (non-EU) and you may need to appoint Fiscal representation
Read our guide on how to ensure you are staying VAT compliant as a non-EU business
Business to business transaction between EU and UK
- Businesses will continue to be able to zero rate goods to EU consumers
- UK VAT registered businesses will not be expected to complete EC sales list in B2B transactions
- Import VAT and customs would be due when the goods enter the EU
- Some VAT payments may be due at the border (it may vary from country to country)
- For those trading services into Europe, you would no longer be able to use the MOSS system and would need to register for the VAT MOSS non-Union scheme
According to Jean-Claude Piris, former head of the EU legal service, he has suggested that an idea of the single market for goods only is ‘Delusional’.
In order for there to be no need for border controls, the UK would need to remain in the Single Market for goods (and the EU VAT area).
Similar to the Norway model, though this would include free movement of labour and substantial budget payments.
Moreover, the EU does not look favourably on the UK having access to the Single market without being part of the free labour movement.
The key considerations facing businesses trading online cross-border following Brexit
- It is likely that the number of customs forms will increase fourfold as custom rules are increased between the UK and the EU
- We may have to trade under the World Trade Organisation (WTO) terms.
- If the UK left the EU and wanted an open border, it would need to be offered to all World Trade Organisation members, so it couldn’t just be with Europe. The UK would have to open their borders to all member countries of the WTO.
- If the UK leaves the EU VAT bloc and the single market – there is likely to be an increase in new legislation
- Following Brexit, it is presumed the UK will no longer be subject to the VAT restriction, and therefore a reduction in rate would be hoped for.
- Selling goods from the UK and Europe may be treated ‘as international transactions’ and businesses may need Fiscal representation and increased VAT registrations
- A weaker pound and less competitive cost of goods could affect smaller businesses
Additionally, the new European VAT directive which is being introduced in 2021 is aimed at creating a Single EU VAT area. The intent is to reduce VAT fraud and simplify procedures.
The rules will shift the way goods and services VAT is paid. The new system is due to be fully operational by 2022. Following Brexit, it is expected that the UK will be treated as a non-EU country at this point.
If the UK decides to opt for a ‘Hard Brexit’ and renegotiate trade deals, then it is likely to be a lengthy process with a level of uncertainty for the market.