With the government entering the final stages of negotiating a Brexit deal, many of our clients are wondering what it will mean for VAT refunds.
As of the 29th January 2020, the UK entered a transition period ensuring we still had all the benefits of other EU member states. This has meant that businesses can still make use of the EU VAT Directive and nothing has changed when it comes to VAT Recovery.
However, once the Brexit transition period ends, EU laws will no longer apply in the UK, resulting in the UK will become a ‘third country’ in relation to EU member states.
With negotiations still ongoing, there is still the possibility that an agreement will be made that regulates the terms of market access between the UK and the EU.
What Will Change for VAT post-Brexit?
The UK will no longer have to assume the EU VAT Directive rules into its own VAT Act and will have complete control over its reduced VAT rates which are currently restricted within the EU VAT Directive rules.
VAT rules relating to domestic transactions will continue to apply as they do and the government are aiming to keep VAT procedures as close as possible to how they are now. There will, however, be inevitable changes to transaction rules between the UK and EU member states.
Assuming the UK leaves the Customs Union, VAT will still be recoverable however the mechanism for recovery will change for UK registered clients recovering from Europe and vice versa. Namely, recovery currently performed under VAT Directive 2006/112/EC (8th Directive) for UK to EU and EU to UK transactions will revert to being 13th Council Directive 86/560/EEC. A different, more manual method of recovery will be required under the 13th Directive and the Tax Authorities have a longer time allowance to issue refunds; up to twelve months instead of the three to four months under the 8th Directive.
Cross Border VAT Refunds
When buying services from outside the UK, and reverse charge mechanisms are in place, this will likely remain unchanged. Reverse charges will continue to be accounted for on services bought from outside the UK.
EU companies looking for a cross-border refund from the UK will almost certainly have to apply via the 13th Directive as the EU Refund Directive (8th Directive) will no longer apply. Details of this are still being reviewed.
The 13th VAT Directive gives the right for a business established outside the EU to recover VAT incurred in one of the 28 member states providing appropriate reciprocity is in place.
Once the transition period ends, the 13th Directive rules will apply to refunds by the EU member states to taxable entities established in the UK. The reciprocity rules will still apply in this case.
Cross Border Supplies of Goods
Supplies and movement of goods between the EU and the UK will be subject to the usual VAT rules on imports and exports. This will mean that all goods going from the UK into the EU will have VAT on them in the destination country.
For UK businesses, this means they will have a foreign import VAT cost to consider. EU businesses making ‘Delivery Duty Paid’ shipments into the UK will also be charged with UK import tax. Import VAT incurred will need to be claimed via the 13th Directive.
What about VAT paid before the end of the Transition Period?
If you have paid VAT before the 31st December 2020, you can continue to use the EU VAT refund systems which will be functional until March 31st 2021. However, in order to process any VAT refund claims under the 8th Directive, all claims will need to be filed BEFORE the 31st March deadline. Claims filed after this date will still be valid however will need to be submitted under the 13th Directive. In practical terms this means that claims filed under the 8th Directive can be done electronically via the online Tax Authority portals using electronic invoice images and if accepted will generally take 3 – 4 months for the refund to be paid. Claims filed under the 13th Directive will need to be submitted in hard copy to the relevant Tax Authority and in the majority of cases, the invoice will need to be an original or a certified copy, not a print out of the electronic image. Refunds can take up to twelve months to be paid once approved.
UK-EU Border Controls Post Brexit
HMRC have already laid out the staged approach to changes over the rules to foods imported to the UK from the EU i.e the new border rules.
1. From January 2021: Traders importing standard goods, covering everything from clothes to electronics, will need to prepare for basic customs requirements, such as keeping sufficient records of imported goods. Traders will also need to consider how they account for and pay VAT on imported goods. Traders will then have up to six months to complete customs declarations. While tariffs will be payable where due on relevant goods, payments can be deferred until the customs declaration has been made. UK Safety and Security declarations will not be required on imports for the first six months. Standard customs declarations will be needed from this date for controlled goods and excise goods like alcohol and tobacco products. There will also be physical checks at the point of destination or other approved premises on all high-risk live animals and plants, and a requirement to pre-notify for certain movements, but they will not be required to enter GB via a Border Control Post (BCP). Export declarations and UK exit Safety and Security declarations will be required for all goods. Traders importing and exporting goods using the Common Transit Convention will need to follow all of the transit procedures- these will not be these will not be introduced in stages. The goods vehicle movement service (GVMS) will be introduced from January only for transit movements.
2. From April 2021: All products of animal origin (POAO) – for example meat, honey, milk or egg products – and all regulated plants and plant products will also require pre-notification and the relevant health documentation. Any physical checks will continue to be conducted at the point of destination until July 2021.
3. From July 2021: Traders moving any goods will have to make full customs declarations at the point of importation and pay relevant tariffs. Full Safety and Security declarations will be required, while for commodities subject to sanitary and phytosanitary (SPS) controls, these will have to be presented to be BCPs and there will be an increase in physical checks and the taking of samples. SPS checks for animals, plants and their products will take place at GB Border Control Posts and not at destination. The GVMS will be in place for all imports, exports and transit movements at border locations which have chosen to introduce it.
EU registered companies shipping goods to the UK via DDP shipments will incur Import VAT that may have been claimed via 13th Directive. UK businesses shipping goods delivered duty paid to the EU may face the same challenges and should be prepared for either extra foreign VAT registration requirements or a more cumbersome VAT reclaim process.
The UK will also likely exit the EU Customs Union, so all goods moving between the UK and EU will require customs declarations and be subject to tariffs.
If you are importing standard goods, you will need to prepare for basic custom requirements. You will have up to six months to submit customs declarations to HMRC. They will need to be paid on imports straight away, but they will be able to be deferred until customs declarations have been made, meaning that traders have time to adjust. Similarly, safety and security declarations will not be required for six months for all goods.
Importers who have been using a single EORI number across the EU may need to get a second EORI number as HMRC have said that imports into the UK must be done on a UK issued EORI number.
Businesses may need to use a different supply chain model such as delivering orders from a different country, however any changes to the supply chain will result in new VAT compliance obligations.
Any UK business with a foreign VAT registration in the EU may now face the obligation to appoint a special VAT fiscal representative. The fiscal representative must be tax registered and willing to act as the local representative of the company, managing queries and filing obligations of the company for dealings with the tax authorities. The fiscal rep is jointly liable for all VAT payments of the company.
Got any questions about VAT Recovery post Brexit? Contact us today: firstname.lastname@example.org