As companies in the UK continue to adapt to the effects of the Covid-19 pandemic, a new challenge is hot on its heels – the end of the Brexit transition period. Although the UK officially left the European Union on 31st January 2020, most of the rules, regulations and tariffs have stayed the same throughout 2020.
Despite a difficult year for most businesses due to the worldwide pandemic, most firms in the UK have had to make few if any changes this year in regard to Brexit to continue their day-to-day operations. However, this is all set to change at the end of December, when the transition period finally comes to an end.
But with the deadline just days away, the UK and EU are still working out how their relationship will look after the dust settles, with many key questions still to be answered.
What is certain, however, is that companies will have to adapt and make changes to trading within a new international environment. This has left many SMEs uncertain of what may lie ahead, with many asking what will happen with VAT and how will it affect them.
The way VAT operates in the UK may change after Brexit, and companies will have to step up to the challenge. Here are some of the key questions UK SMEs need to consider regarding VAT and Brexit:
Will VAT stop when the UK fully leaves the EU?
No, VAT will not stop, but UK VAT and EU VAT will be different after the transition period ends.
The UK’s VAT system currently works under a framework set out by EU VAT regulations, which affect all EU member states but not to those within the European Economic Area.
The UK introduced VAT in 1973 when it first joined the European Economic Community, which later evolved into the EU.
When the transition period ends, the UK will leave the EU VAT area. However, Northern Ireland would still remain within the scope of the EU’s VAT regulations on goods.
The UK government will be able to charge different rates for products and services and the UK will not be able to use any of the simplification arrangements in the EC such as MOSS (Mini One Stop Shop).
Will VAT apply if my company provides services to customers based in EU countries?
The simple answer is yes.
If a business provides services to a non-business customer within the European Union, you would potentially be liable to pay UK VAT on the goods or services supplied.
Will my company need to register for VAT separately in each EU country where we have customers?
This all depends on whether your customers are businesses within the EU and whether they have been registered for VAT themselves. If your customer is a firm within the EU, and has registered for VAT, then you will be able to reverse charge the supply.
When the reverse charge is applied, the recipient of the goods or services makes the declaration of both their purchase (input VAT) and the supplier's sale (output VAT) in their VAT return. In this way, the two entries cancel each other out from a cash payment perspective in the same return. The supplier only needs to include the net sale in box 6 of their VAT return.
However, you would need to make sure you keep clear evidence of the basis of why a reverse charge is being operated.
If your customer has not registered for VAT in their country, then you may have to register yourself.
Will businesses based in the EU have to register for UK VAT?
This depends on whether the EU business supplies services to firms in the UK.
If the UK business they supply to is VAT registered, they could benefit from the process of reverse charging. However, if the UK business they supply to is not registered, the company in the EU may need to register for UK VAT.
If a business based in the EU is supplying goods to the UK, it will depend upon who the importer is treated to be, which will be a contractual agreement and will reflect who has the liability for import VAT. Specific advice should be taken on the import or export of goods and contractual arrangements.
Does the end of the transition period mark the end of EC Sales lists and Intrastat returns?
EC sales lists will end from 1st January 2021, when the transition period concludes. Intrastat returns, however, are necessary for companies importing goods from the EU. This is to assist in tracking those deferring customs declarations.
Again, it becomes more complicated when it comes to Northern Ireland. There, businesses will be required to continue with intrastate returns, under the Northern Ireland Protocol, up until 2025.
Firms that exclusively export to the EU, however, will not need to make any Intrastat returns.
Can the Government alter the UK’s VAT system after the full withdrawal?
Yes, there is potential for the Government to make changes to the structure of VAT post-Brexit, however, this will depend on the terms of the final agreement made between the UK and EU.
When the UK fully withdraws from the European Union it will no longer have to work within the framework of the EU VAT Directive. This may give the Government the potential for flexibility in changing the rate of VAT or to remove or reform exemptions.
This will depend heavily however on the political situation and would not be something the Government would do lightly and would likely face opposition. It's hypothetically possible for the Government to scrap VAT altogether when it fully leaves the EU – but this is so unlikely it can essentially be ruled out as a possibility.
As VAT is a huge revenue raiser for the Government, bringing in around 18% of tax receipts, it's likely to be with us for the long run.
Please note that this information is for guidance only and would advise firms to seek full tax advice specific to their circumstances before the end of the transition period.
About the Author
Andrew Diver is Head of Taxation at Beatons Group, based in Ipswich, Suffolk. Beatons Group provide high-quality accountancy services, tax advice, audit, management accountancy and financial outsourcing to clients nationwide. Established in 1981, Beatons has developed into a major independent provider of accounting and financial services in the UK.