Uncertainty over Brexit continues, but by November there should be more clarity on what sort of deal if any will be signed between the UK and the EU 27. Meanwhile customs and VAT are potentially the two most affected taxes.

On 23rd August the UK government published the first batch of its technical notes about the consequences of there being no withdrawal agreement reached between the UK and the EU by the time the UK leaves the EU on 29 March 2019 (a 'no-deal' scenario). The papers published included one on VAT for businesses if there's no Brexit deal as well as notes on customs and excise duties.

The VAT note summarises the current position for cross border supplies of goods and services and refers to the main issues that will arise for businesses in a 'no deal' scenario:

  • Imports of goods: After 29 March 2019, businesses will have to account for import VAT on goods brought in to the UK from the EU as they already have to for goods brought in from non-EU countries. However, the UK will allow for delayed VAT accounting in quarterly VAT returns, rather than payments at the border, for imports from all jurisdictions, not just the EU 27, to assist businesses' cash flow
  • Exports of goods: In relation to UK businesses exporting goods to EU consumers, the note says that distance selling arrangements will no longer apply and UK businesses will be able to zero-rate sales of goods to EU 27 consumers
  • UK VAT Mini One Stop Shop: Businesses will no longer be able to use the UK's mini one stop shop portal to report and pay VAT on sales of digital services to consumers in the EU and will have to register for the non-union scheme in an EU member state (assuming they wish to continue to use a one stop shop rather than registering for VAT in each EU member state where sales are made)
  • EU Refund System: UK businesses will have to use the existing processes for non-EU businesses under the 13th Directive rather than the electronic portal under the Refund Directive for EU businesses

DLA Piper Comment:

Businesses face continuing uncertainty around Brexit given that it is still not clear what deal if any will be agreed and whether there will be a transitional period which effectively maintains the status quo until December 2020.

At the same time the European Commission has published its latest ‘stakeholder’ notice on EU VAT rules in the case of a 'no deal' Brexit. A copy of the notice is available here.

According to the Supreme Court decision Totel Limited [2018] UKSC 44 the VAT prepayment rule (section 84(3) of the Value Added Tax Act 1994) requiring disputed VAT to be paid before lodging an appeal did not contravene the EU law principle of equivalence. The equivalence principle requires that rules regulating recovery of taxes breaching EU law have to be no less favourable than those governing similar domestic actions. The taxpayer argued that the prepayment rule contravened the equivalence principle because legislation governing appeals concerning certain UK taxes without EU law roots had no prepayment rule.

DLA Piper Comment:

This is the final word confirming the right of the UK government to have rules which require taxpayers who wish to appeal VAT assessments, to pay the VAT demanded up-front unless they can show that this would cause them hardship. The Supreme Court dismissed the appeal on the grounds that other taxes such as income tax and capital gains tax were not true comparators with VAT so that the principle of equivalence was not engaged. The court reached the conclusion on the basis that the economic burden of VAT falls on the ultimate consumer rather than on the trader as it does with direct taxes. The trader, in VAT, acts very much as tax collector for the Government. Insurance premium tax has similar prepayment rules.

In KD Media Publishing [2018] UKFTT 0494 (TC) the First-tier Tribunal has held that a taxpayer who was entitled to a credit for overpaid VAT was unable to set that credit against payments of VAT made following the overpayment but before its discovery, not least because the law only provided for a credit or repayment to be given on a claim being made. The tribunal, therefore, dismissed the taxpayer's appeal against the amount of several VAT default surcharges imposed in respect of late paid VAT for those periods, which the taxpayer claimed should have been reduced by the amount of the credit. The decision, although unfortunate for taxpayers who find themselves in this situation, accords with the principle that VAT due in respect of each VAT quarter is a separate debt, and there is no "running account" between HMRC and a taxpayer spanning multiple VAT quarters.