Although many of the tax implications of Brexit are currently unknown, it is VAT and customs duties which are most likely to be affected. As these are based on EU law, Brexit provides an opportunity for the UK government to make legislative changes to these taxes. In this guide ICAEW's Tax Faculty outlines the potential consequences.
Dispatches of goods to other EU Member States have generally not been subject to border controls since the creation of the single market on 1 January 1993. The European single market consists of the EU's 28 member states with the addition of Iceland, Liechtenstein, Norway and Switzerland.
The single market seeks to guarantee the free movement of goods, capital, services and labour, the ‘four freedoms’, within the EU. Turkey has access for the free movement of goods through its membership of the EU Customs Union.
If the UK leaves the single market, it is likely that formal procedures will be reintroduced for supplies of goods from the UK to the remaining countries of the EU. These are likely to be similar, if not identical, to the current procedures for exports to countries outside the EU.
Businesses that currently only have a low value of sales to other EU Member States can benefit from the distance selling thresholds of up to about £70,000 per annum. It is very unlikely that this facility will continue to be available after Brexit, as the same export rules will apply as to those of higher value. Sales below the distance selling thresholds are currently subject to UK VAT, unless the supplier has decided to register for VAT in the country of destination. However, these sales are likely to become zero rated exports after Brexit.
We can expect that the supply of services to customers in the EU after Brexit to be treated the same as those to any customer outside the EU both now and after Brexit. However, the special rules for the supply of broadcasting, telecommunications and electronic services will continue to apply, although the method of declaring them is likely to change (see Mini One Stop Shop).
EC Sales Lists were introduced as an anti-fraud measure to collect data on the sales of goods between EU Member States when formal import and export procedures were abolished with the creation of the single market on 1 January 1993. They were extended to include sales of services with effect from 1 January 2010.
If formal import and export declarations are to be re-imposed after Brexit, or any transitional period, we could expect the requirement to complete EC Sales Lists for sales from the UK to customers in the remaining EU Member States to be abolished.
Intrastat was introduced to collect data on the movement of goods between EU Member States when formal import and export procedures were abolished with the creation of the single market on 1 January 1993.
If formal import and export declarations are to be re-imposed after Brexit, or any transitional period, we could expect the abolition of the requirement to complete Intrastat returns for the movement of goods to and from the UK to be abolished.
If the UK leaves the single market, it is likely that formal procedures will be reintroduced for goods entering the UK from suppliers in the remaining EU countries. These are likely to be similar, if not identical, to the current procedures for imports from countries outside the EU.
This may necessitate an increase in any duty deferment guarantees to cover any VAT and customs duty that may be imposed. Alternatively, it is possible the UK could reintroduce postponed accounting for import VAT, as was the case for about the first 10 years of VAT. This operated in a similar way to acquisition VAT or the reverse charge for services.
A UK business can currently recover VAT incurred in other EU countries using an electronic system. This facility will probably cease to be available to UK businesses after Brexit, meaning that any claims will have to be submitted to the local tax authorities under the terms of the EU 13th Directive refund scheme. EU business incurring UK VAT after Brexit will be similarly disadvantaged unless agreement to continue the existing scheme can be made in the Brexit negotiations.
If the UK leaves the customs union, we can expect customs duty to become payable by EU businesses when importing goods from the UK and by UK businesses when importing goods from the EU. The rates applicable would vary according to the classification of the goods concerned.
The Mini One Stop Shop (MOSS) was introduced when changes were made to the VAT place of supply rules on 1 January 2015. From this date, the place of supply became where the customer belongs for all business to consumer (B2C) supplies of broadcasting, telecommunications and electronic services. The MOSS system allows businesses to declare overseas VAT on electronic B2C services to its own tax authority where the customer is located in another EU Member State.
Brexit will make no difference to the place of supply rules, so VAT will still need to be charged and accounted for in relation to affected supplies to customers in the remaining EU countries. This may mean registering for the non-Union Mini One Stop Shop scheme in a remaining EU country, such as Ireland, unless HMRC is able to continue operating a UK scheme.
Ideally, HMRC should seek to continue operating MOSS for UK businesses trading with the EU. However, there are EC proposals to extend the MOSS system across the EU to include all B2C supplies, including goods. The next stage after that is expected to be a further extension to include all intra-community supplies of goods and services, whether B2B or B2C, which may make it impossible for a non-EU country to participate.
The idea is that all suppliers would then charge VAT at the VAT rate applicable in the countries of its customers for all supplies of goods and services. Businesses would therefore need to know the VAT rates applicable to all of their goods and services in all countries where they had a customer. This is in line with the OECD guidelines on indirect taxation to tax in the country of destination, wherever possible.
There has to be mutual trust between the tax authorities to enable MOSS to work. The other 27 EU countries currently collect UK VAT from suppliers to the UK, which are based in their countries. Will they be prepared to collect UK VAT on behalf of HMRC after Brexit? If not, it is difficult to see how HMRC would be allowed to continue to collect the overseas VAT for them.
Many countries throughout the world are introducing local VAT/GST on supplies by overseas businesses to their domestic consumers, Australia and New Zealand being recent examples. An extension of the MOSS principle worldwide would be of great assistance here. For example, if a business was making supplies to consumers in 100 countries throughout the world, which were liable to VAT or GST in half of them, it could have to register for local VAT or GST in 50 countries. If HMRC could collect the local VAT/GST for all these countries, that would mean 200 fewer VAT returns for the business to complete each year, assuming that quarterly returns would otherwise be required in each country.
We can expect changes to the tour operators’ margin scheme (TOMS), which could be abolished altogether. As a minimum, we should press for MICE (meetings, incentives, conferences and exhibitions) businesses to be excluded from TOMS.
This scheme is due to be introduced on 1 April 2018 for businesses that store goods imported into the UK from outside the EU. After Brexit, it appears likely that it will also apply to what will then be imports from the EU.
In theory, VAT rates could change, up or down. Items currently subject to VAT at 5% could become zero-rated, which is not permitted under EU VAT law, although such changes are not currently permitted under the UK VAT Lock legislation.
It is expected that EU VAT law and rulings of the Court of Justice of the European Union will cease to have direct effect in the UK after Brexit, with the UK law becoming the ultimate law and the UK Supreme Court the ultimate court.