Summary: It is important that businesses consider how a ‘no deal’ Brexit scenario could affect them, and begin to take steps to mitigate against this risk. In order to plan ahead, businesses need to understand their current supply chains and have a broad conception of what the no deal Brexit VAT rules will be.

HMRC have now issued guidance on how VAT will change if the UK leaves the EU with no agreement.

Any business which is involved in cross border transactions involving the UK should begin to consider carefully the additional costs (whether absolute or cash flow) of a “no deal” Brexit.  There may be circumstances where businesses could take action now which may avoid unnecessary burdens on the business after 29 March 2019, if the UK has not reached an agreement with the EU as regards VAT.

The current rules

By way of background, under the current VAT rules:

  • VAT is charged on most goods and services sold within the UK and the EU.
  • VAT is payable by businesses when they bring goods into the UK. There are different rules for goods coming from an EU country and from a non-EU country.
  • UK goods that are exported to non-EU countries or to businesses elsewhere in the EU are zero-rated.
  • UK goods that are exported to EU consumers have either UK or EU VAT charged (these are known as the “distance selling” rules).
  • for services the ‘place of supply’ rules determine the country in which VAT is charged.

No deal Brexit – VAT implications

The current rules relating to domestic transactions will not change.

However, there will be some changes to the VAT rules and procedures that apply to transactions between the UK and EU member states.

Importing goods from the EU

  • The UK government has committed to introducing “postponed accounting” for import VAT on goods brought into the UK.
  • UK VAT registered businesses importing goods to the UK will be able to account for import VAT on their VAT return, rather than paying import VAT on or soon after the time that the goods arrive at the UK border. This will apply both to imports from the EU and non-EU countries.
  • Customs declarations and the payment of any other duties will still be required.

Exporting goods to EU businesses

  • Businesses will continue to be able to zero-rate sales of goods to EU businesses. However, they will not be required to complete EC sales lists.
  • Businesses exporting goods to an EU business will need to retain evidence to prove that goods have left the UK, to support the zero-rating of the supply.

Exporting goods to EU private individuals

  • The distance selling arrangements will no longer apply to UK businesses; all sales of goods to EU customers will be zero-rated.

Supplying services into the EU

  • The “place of supply” rules determine the country in which VAT needs to be charged. These rules will remain broadly the same.
  • For UK businesses supplying digital services to non-business customers in the EU the “place of supply” will continue to be where the customer resides. VAT on services will be due in the EU Member State within which the customer is resident.
  • For UK businesses supplying insurance and financial services, input tax deduction rules for financial services supplied to the EU may be changed. We await further guidance from HMRC on this.

EU VAT refund system

  • Businesses will still be able to claim refunds of VAT from EU member states. However,  they will need to use the processes for non-EU businesses. This process varies across the EU and businesses will need to make themselves aware of the processes in the individual countries where they incur costs and want to claim a refund.