The United Kingdom (UK) formally withdrew from the European Union (EU) in January 2020 and entered a transition period that remains in place until 31st December 2020. Until then, all EU law, including Customs and VAT law, remain applicable. The UK Government ruled out the possibility of extending the transition period, however as yet no formal agreement has been concluded on the terms of the new EU-UK partnership post year end. The final impact of Brexit on businesses, Member States and future trade remains therefore unclear. Whilst it is hoped that a comprehensive free trade agreement is reached, which would secure the ability to trade free of duties, tariffs and quotas, the prospect of ‘no deal’ remains high and businesses and practitioners need to be prepared for both outcomes.
After the end of the transition period, the UK shall be considered as a third country for VAT purposes. This means that the rules that are currently applicable for supplies of goods and services to non-EU persons shall in principle apply to EU-UK transactions. Below, we share some further considerations on the VAT treatment of goods and services as well as VAT recovery.
Treatment of Goods
A supply of goods to a UK business or customer shall represent an export. The VAT exemption for exports will be applicable as long as the regular conditions are met. On the other hand, imports of goods from the UK into the EU will be subject to VAT and potentially custom duties, resulting in a negative cash flow impact for businesses where VAT deferment is not allowed. Businesses involved in supply chains and/or triangulation trade with UK parties need to analyse their transactions and logistics agreements to identify any changes required and remain VAT compliant under the new regime.
Treatment of Services
In the context of the B2B and B2C general rules, where the place of supply is deemed to be in the UK the transaction shall be deemed to take place outside of the EU and shall therefore not be subject to EU VAT. It is to be noted however that the place of supply rules for Telecommunications, Broadcasting and Electronically Supplied services (TBEs) to customers established in UK will remain the same, in other words, VAT shall be due in the UK. Businesses providing TBEs to UK customers will no longer be able to use the Mini One Stop Shop (MOSS) to report and pay VAT due there, rather they shall be required to register in the UK and comply with national rules. The UK’s departure from the EU shall also mean that UK businesses registered for MOSS and suppliers established outside the EU but identified in the UK under the non-Union Scheme will have to switch and make use of the non-Union Scheme in another Member State.
Businesses need also to consider Brexit vis-à-vis the new VAT provisions that shall come into effect in 2021 under the VAT e-Commerce Package, particularly in respect of the extension of the OSS currently in place for TBEs to cover other B2C services as well as the abolition of the current VAT exemption on low value imports and the introduction of the Import Scheme.
After the end of the transition period, EU VAT recovery by UK businesses shall be governed by the provisions of the 13th VAT Directive. Similarly, EU businesses shall be able to claim VAT incurred in the UK via a paper-based system. Both regimes make reference to the reciprocity condition, in that refund may be denied if the other jurisdiction does not reciprocate VAT refunds.
The current negotiations between the EU and UK will shape the future relationship between the two parties. It is not yet certain whether an agreement will be concluded and will enter into force at the end of the transition period. In any event however, the UK will no longer be part of the EU’s Single Market and Customs Union as from 1st January 2021 and businesses need to prepare themselves for the VAT changes that Brexit will bring about. Businesses are encouraged to draw up a Brexit Action Plan and to review it as further developments occur.