Changes we can expect to the UK VAT regime once the UK has left the EU

With all the COVID19 shenanigans, it’s easy to forget that Brexit it still underway, here Senior VAT Manager at MHA Larking Gowen, Rob Skilton, has summarised the changes we can expect to the UK VAT regime once the UK has left the EU.

Import VAT on all goods?

The biggest potential VAT disruption for businesses post transitional period was the scope for import VAT to be due on all movements of goods into the UK. Currently, import VAT has to be paid before goods are released into free circulation in the UK. This is paid either physically or via a duty deferment account which requires financial guarantees.

The Government has recognised that businesses acquiring goods from the EU account for the acquisition tax through their VAT returns, giving a nil net cash flow position for a fully taxable business. Having to pay the VAT before being able to recover the VAT presents a very significant cash flow impact many businesses can’t afford.

As a result, from 1 January 2021, postponed VAT accounting has been legislated. This means all import VAT (which should include movements of goods from the EU at that point) can be accounted for through the VAT return.

For businesses trading within the EU this represents little change from the current position. For importers of goods from the rest of the world, this could represent a significant cash flow advantage.

What about services?

Historically, you don’t have to pay import VAT on services. Instead, subject to certain overrides, supplies between businesses have been liable to reverse charge procedures in the member state of the recipient. Supplies to consumers have been taxed in the member state of the supplier.

We’re not expecting any immediate change for the majority of services. In fact, the only changes are legislative references to “the UK and EU”, rather than “the EU”, to avoid any unintended consequences of the UK exit.

A complete overhaul?

Whilst a member of the EU, the UK has been bound by overarching European VAT legislation, which has given rise to a number of anomalies over the years (hence all of the controversy surrounding what food products can be zero rated).

Once the UK leaves the EU, it will be able to rewrite the VAT legislation (which has existed in its current form since 1994) without restriction.

By removing VAT from women’s sanitary products with effect from 1 January 2021, the Government has already acknowledged this opportunity exists. However, whether there will be further changes to the VAT treatment of domestic fuel, food products (also referred to as “pasty tax” a few years ago) or a wholesale overhaul of the VAT system remains to be seen.

There have also been long-running differences in the interpretation of financial services for exemption purposes across Europe, which the UK will now be able to tailor as it wishes.

The UK may also choose to withdraw some exemptions which it was hesitant to implement including cultural, sporting and cost-sharing group exemptions.

In the short term, it’s likely that the UK will continue to follow key European Court rulings, particularly in relation to VAT abuse, given the importance of maintaining a semblance of normality until a wider review can be completed.

Overseas operations?

Whilst the UK is keen to minimise the disruption and VAT cost to businesses, it does not follow that all EU member states will be as keen to soften the impact.

Any business which is holding stock in other EU member states, or is supplying goods or electronically supplied services, may need to register for VAT in a remaining EU member state. We would recommend you review supply chains to understand the potential impacts for the member states where supplies are made to make sure any reporting requirements or potential disruptions to supply chains are identified and managed.

MHA Larking Gowen has launched a Brexit Hub on its website where more information on the impact of Brexit can be found.

If you’d like to know more about VAT on Brexit, please get in touch with your usual contact. You can find contact details on the Our People section of the MHA Larking Gowen website. Alternatively, call 0330 024 0888 or email [email protected].