The hottest topics in the press at the moment revolve around a particular date, 29 March 2019. This is the date that the UK is due to leave the EU under Article 50 of the Lisbon Treaty. Given that this is an unprecedented event in the UK, there is still much uncertainty regarding the UK’s future relations with the EU.
A scenario in which the UK leaves the EU without agreement (a ‘no deal’ scenario) remains unlikely given the mutual interests of the UK and the EU in securing a negotiated outcome.
However, we want to make our clients and contacts aware of the implications of a ‘no-deal’ Brexit, so they can make informed plans and preparations.
Before 29 March 2019
Under current VAT rules:
- VAT is charged on most goods and services sold within the UK.
- VAT is payable by businesses when they bring goods into the UK. There are different rules depending on whether the goods come from an EU (where you would typically apply acquisition tax) or non-EU country (where import VAT is payable when the goods enter the UK).
- Goods that are exported by UK businesses to non-EU countries are zero-rated, meaning that UK VAT is not charged at the point of sale.
- Goods sold from the UK to EU business customers are zero-rated in the UK, as long as the purchaser is VAT registered in their EU country.
- Goods that are exported by UK businesses to EU consumers have either UK or EU VAT charged, subject to distance selling thresholds.
- For services, the ‘place of supply’ rules determine the country in which you need to charge and account for VAT.
Under current customs and excise rules:
- Businesses can currently move goods freely between EU member states. For customs, this means that businesses trading with the rest of EU do not have to make any customs import or export declarations, and their trade with the EU is not subject to import duty.
- Certain goods are subject to excise duty. This is a tax charged on the importation and manufacture of alcohol, tobacco and perfumes. These goods can currently move freely between the UK and the rest of the EU with excise duty suspended, in certain circumstances.
What would happen in a 29 March 2019 ‘no-deal’ scenario?
If the UK left the EU on 29 March 2019 without a deal there would be immediate changes to the procedures that apply to businesses trading with the EU. It would mean that the free circulation of goods between the UK and EU would cease.
Businesses importing from the EU in a 29 March 2019 ‘no-deal’ scenario
After the UK leaves the EU, in the event of a ‘no deal’ scenario, businesses importing goods from the EU will be required to follow customs procedures in the same way that they currently do when importing goods from a country outside the EU. This means that for goods entering the UK from the EU an import declaration will be required, customs checks may be carried out and any customs duties must be paid.
In particular, when importing goods from the EU, a business will need to:
- Have a valid UK Economic Operator Registration and Identification (EORI) number.
- Ensure their contracts and International Terms and Conditions of Service (INCOTERMS) reflect that they are now an importer.
- Make sure that their carrier has submitted an Entry Summary Declaration at the appropriate time.
- Submit an import declaration to HMRC using their software, or get their customs broker, freight forwarder or logistics provider to do this for them (presumably at an additional cost).
- Pay import duties including excise duty on excise goods.
- Once excise goods leave a customs suspensive arrangement, they may be immediately entered into an excise duty suspension regime. A business will need to declare the goods on the Excise Movement Control System (EMCS) for onward movement via a Registered Consignor.
- Businesses may also need to apply for an import licence.
With regards to VAT:
- The government will introduce postponed accounting for import VAT on goods brought into the UK. This means that 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.
- VAT will be payable on goods entering the UK as parcels sent by overseas businesses.
- Low-Value Consignment Relief (LVCR) will not be extended to goods entering the UK from the EU. LVCR will no longer apply to any parcels arriving in the UK. This means that all goods entering the UK as parcels sent by overseas businesses will be liable for VAT (unless they are already relieved from VAT under domestic rules, for example zero-rated children’s clothing).
- For parcels valued up to and including £135, a technology-based solution will allow VAT to be collected from the overseas business selling the goods into the UK. Overseas businesses will charge VAT at the point of purchase and will be expected to register with an HM Revenue & Customs (HMRC) digital service and account for VAT due.
- On goods worth more than £135 sent as parcels, VAT will continue to be collected from UK recipients in line with current procedures for parcels from non-EU countries.
- Businesses should continue to notify HMRC about vehicles brought into the UK from abroad as they do now under the Notification of Vehicle Arrival Procedures (NOVA) system. Import VAT will be due on vehicles you bring into the UK from EU member states. Certain reliefs will also be available as with current imports of vehicles from non-EU countries.
Businesses exporting to the EU in a 29 March 2019 ‘no-deal’ scenario
After the UK leaves the EU, in the event of a ‘no deal’ scenario, businesses exporting goods to the EU will be required to follow customs procedures in the same way that they currently do when exporting goods to a non-EU country.
In particular, when exporting goods to the EU, a business will need to:
- Have a valid UK Economic Operator Registration and Identification (EORI) number.
- Ensure their contracts and International Terms and Conditions of Service (INCOTERMS) reflect that they are now an exporter.
- Submit an export declaration to HMRC using their software or online, or get their customs broker, freight forwarder, or logistics provider to do this for them. (The export declaration may need to be lodged in advance so that permission to export is granted before the goods leave the UK).
- Customs duties may be due when the goods arrive into the EU.
- Businesses may also need to apply for an export licence.
- When exporting duty suspended excise goods to the EU, a business will need to continue to use the Excise Movement Control System (EMCS) to record the duty suspended movement from a UK warehouse or premises to the port of export.
With regards to VAT:
- VAT registered UK businesses will continue to be able to zero-rate sales of goods to EU businesses but will not be required to complete EC sales lists, although they will still need to retain evidence to prove that goods have left the UK.
- Current EU rules would mean that EU member states will treat goods entering the EU from the UK in the same way as goods entering from other non-EU countries with associated import VAT due when the goods arrive into the EU. Individual EU member states may have different rules for import VAT for non-EU countries and import VAT payments may be due at the border when importing goods. UK businesses should check the relevant import VAT rules in the EU Member State concerned.
- UK businesses will be able to continue to sell goods they have stored in an EU Member State to customers in the EU in line with current Rest of World rules.
- Current EU rules would mean that UK businesses will continue to be required to register for VAT in the EU member states where sales are made in order to account for the VAT due in those countries.
Carriers moving goods between the UK and the EU – Safety and Security Declarations
After the UK leaves the EU, in the event of a ‘no deal’ scenario, carriers (for example hauliers, and train, vessel or aircraft operators) will need to make a Safety and Security Declaration for goods moving between the UK and EU. There are two types of Safety and Security Declarations: an Exit Summary Declaration (EXS) and an Entry Summary Declaration (ENS).
A carrier is generally required to submit an EXS to the customs authority of the country from which the consignment is being exported. For consignments exported from the UK, the EXS generally forms part of the Export Declaration (a customs declaration).
A carrier is required to submit an ENS to the customs authority of the country that the consignment is entering.
UK businesses supplying and purchasing services into and from the EU
So what if your UK business is supplying services into the EU, how do you account for VAT?
If the UK leaves the EU without an agreement, the main VAT ‘place of supply’ rules will remain the same for UK businesses.
The current ‘place of supply’ rules determine the country in which you need to charge and account for VAT.
For example, a UK business purchasing services from the EU will need to account for VAT in the UK via the reverse charge, although there are exceptions for land-related services.
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 your customer is a resident, which will likely mean a local VAT registration is required in the relevant EU country.
For UK businesses supplying insurance and financial services, if the UK leaves the EU without an agreement, input VAT deduction rules for financial services supplied to the EU may be changed (currently certain financial services supplied to non-EU customers are eligible for VAT recovery, but this is unlikely to continue if it means these businesses can recover on services provided to EU customers too).
EU Tour Operators’ Margin Scheme
The Tour Operators Margin Scheme is an EU VAT accounting scheme for businesses that buy and sell on certain travel services that take place in the EU. HMRC has been engaging with the travel industry and will continue to work with businesses to minimise any impact.
UK VAT Mini One Stop Shop (MOSS)
If the UK leaves the EU without an agreement, the UK will stop being part of EU-wide VAT IT systems such as the VAT Mini One Stop Shop. Businesses that sell digital services to consumers in the EU will be able to register for the MOSS non-union scheme.
MOSS is an online service that allows EU businesses that sell digital services to consumers in other EU member states to report and pay VAT via a single return and payment in their home Member State. Non-EU businesses can also use the system by registering in an EU Member State.
If the UK leaves the EU with no agreement, businesses will no longer be able to use the UK’s Mini One Stop Shop (MOSS) portal to report and pay VAT on sales of digital services to consumers in the EU.
Businesses that want to continue to use the MOSS system will need to register for the VAT MOSS non-Union scheme in an EU Member State. This can only be done after the date the UK leaves the EU. The non-union MOSS scheme requires businesses to register by the 10th day of the month following a sale. You will need to register by 10 April 2019 if you make a sale from the 29 to 31 March 2019, and by 10 May 2019 if you make a sale in April 2019.
Alternatively, a business can register in each EU Member State where sales are made.
EU VAT refund system
If the UK leaves the EU without an agreement, then UK businesses will continue to be able to claim refunds of VAT from EU member states but in future, they will need to use the existing processes for non-EU businesses.
UK business will no longer have access to the EU VAT refund system. UK businesses will continue to be able to claim refunds of VAT from EU member states by using the existing 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.
EU VAT Registration Number Validation
The EU VAT Registration Number Validation service allows businesses to check whether a customer or supplier’s VAT number is valid.
UK businesses will be able to continue to use the EU VAT number validation service to check the validity of EU business VAT registration numbers. UK VAT registration numbers will no longer be part of this service. In the event of no agreement, HMRC is developing a system so that UK VAT numbers can continue to be validated. This is important for certain businesses to carry out due diligence.
What can you do to prepare?
The steps and obligations businesses will need to take to continue to trade with the EU if the UK leaves without a deal are broadly the same as those that apply to businesses that trade with countries outside of the EU.
In summary, actions businesses can take now to prepare, include the following:
- Understand what the likely changes to customs and excise procedures will be to their businesses in light of the above information.
- Take account of the volume of their trade with the EU and consider the impact on their role in supply chains with EU partners. Can these be simplified to help mitigate any adverse effects of a ‘no-deal’ Brexit?
- If necessary, put steps in place to renegotiate commercial terms to reflect any changes in customs and excise procedures and any new tariffs that may apply to UK-EU trade.
- Consider how they will submit customs declarations for EU trade in a ‘no-deal’ scenario, including whether they should engage the services of a customs broker, freight forwarder or logistics provider to help, or alternatively secure the appropriate software and authorisations from HMRC.
- Consider registering for VAT in another EU country. Once goods are in that country they are subject to “free circulation” under the current EU rules.
- Establish a presence in another EU country, e.g. a storage area for goods.
- Consider whether using customs procedures would be beneficial. These allow businesses to delay or relieve the payment of customs duty for goods they import into the EU until goods are ready to be released into free circulation. Customs procedures include the following:
- Customs warehousing: this allows businesses to store goods with duty or import VAT payments suspended. Once goods leave the warehouse, duty must be paid unless the business is re-exporting or moving goods to another customs procedure. The warehouse must be authorised by HMRC.
- Inward processing: this allows businesses to import goods from non-EU countries for work or modification in the EU. Once this has been completed, any customs duty and VAT due must be paid, unless goods are re-exported or moved to another customs procedure, or released to free circulation.
- Temporary admission: this allows business to temporarily import and or/export goods such as samples, professional equipment or items for auction, exhibition or demonstration into the UK or EU. As long as the goods are not modified or altered while they are within the EU, the business will not have to pay duty or import VAT.
- Authorised use: this allows a reduced or zero rate of customs duty on some goods when used for specific purposes and within a set time period.
- For excise duty purposes, goods are not regarded as imported if they are immediately placed under one of these customs procedures. Businesses need to pay excise duty when these goods are released for free circulation unless they are immediately placed in excise duty suspension.
At RDP Newmans LLP, we are here to help companies of all sizes and across all sectors make sense of Brexit, alongside offering the more traditional accounting, tax and business advice services.
For more information on how we can help, please contact our Tax Director, Nikhil Oza, at firstname.lastname@example.org