BREXIT, Taxes and you – through a dark glass clearly, The Other Side of the ‘Pond’ with HTJ Tax

 

Brexit refers to the UK-EU withdrawal agreement, which was negotiated and concluded under Article 50(2) of the Treaty on European Union (TEU) and came into force at 11.00 pm (UK time) on 31 January 2020 (exit day), when the UK left the EU.

The European Union now consists of 27 countries 1 , who retain as between themselves an interlinked EU VAT regime, Customs Union and Single Market. This means the retention of a range of compliance simplifications and an integrated system of customs declarations, goods regulations, services.

Consequent to increased e-commerce, it is noted that The EU's VAT system was last updated in 1993 and has not kept pace with the rise in cross-border e-commerce that has transformed the retail sector in recent years. The Coronavirus pandemic has also further accelerated the boom in online retail, and again underlined the need for reform to ensure that the VAT due on online sales gets paid to the country of the consumer. The new rules also respond to the need to simplify life for shoppers and traders alike.  Under the current EU rules:

  • Suppliers/sellers might be required to register in various Member States to collect EU VAT at various rates on their services/sales;
  • An optional declarative system (called the Mini One-Stop-Shop or "MOSS") allows suppliers of B2C digital services to declare the VAT due on their B2C digital supplies in a single quarterly VAT return, by registering in one EU Member State only;
  • Imported goods from non-EU countries with a value lower than €22 are VAT-exempt.

As of 1 July 2021, a number of changes will be introduced to the way that VAT is charged on online sales, whether consumers buy from traders within or outside the EU:

  • Under the current system, goods imported into the EU valued at less than €22 by non-EU companies are exempt from VAT. This exemption is lifted so that VAT is charged on all goods entering the EU – just like for goods sold by EU businesses.
  • Currently, e-commerce sellers need to have a VAT registration in each Member State in which they have a turnover above a certain overall threshold, which varies from country to country. From 1 July, these different thresholds will be replaced by one common EU threshold of €10,000 above which the VAT must be paid in the Member State where the goods are delivered. To simplify life for these companies and to make it much easier for them to sell into other Member States, online sellers may now register for an electronic portal called the "One Stop Shop" where they can take care of all of their VAT obligations for their sales across the whole of the EU. This €10,000 threshold is already applicable for electronic services sold online since 2019.

1 https://europa.eu/european-union/about-eu/countries_en accessed 24 August 2021

Rather than grappling with complicated procedures in other countries, they can register in their own Member State and in their own language. Once registered, the online retailer can notify and pay VAT in the One Stop Shop for all of their EU sales via a quarterly declaration. The One Stop Shop will take care of transmitting the VAT to the respective Member State.

  •  In the same vein, the introduction of an Import One Stop Shop for non-EU sellers will allow them to register easily for VAT in the EU, and will ensure that the correct amount of VAT
    makes its way to the Member State in which it is finally due. For consumers, this means a lot more transparency: when you buy from a non-EU seller or platform registered in the One Stop Shop, VAT should be part of the price you pay to the seller. That means no more calls from customs or courier services asking for an extra payment when the goods arrive in your home country, because the VAT has already been paid. Already, businesses outside the EU have been registering in large numbers for the Import One Stop Shop, including the biggest global online marketplaces. 2

So, HTJ thinks the key takeaways are as follows:

  • The possibility to make Customs declarants (e.g. postal operators or courier firms) liable to collect import VAT from consumers via a monthly payment;
  • The shift of EU VAT liability to marketplaces when they facilitate the delivery of goods to the EU consumers.
  • Under certain circumstances, digital marketplaces will be responsible in collecting VAT on the following cross-border B2C sales of goods they facilitate, in order to combat VAT fraud
  • All shipments will need to be cleared through Customs (abolition of the VAT de-minimis rule for Customs declaration)
  • Compliance costs savings by using a single VAT return and reducing the number of VAT registrations in the EU;
  • Suppliers/sellers systems must recognise the VAT status of their clients, the countries of import/dispatch/arrival of the goods and capture the VAT rates applicable (there are more
    than 80 different EU VAT rates)
  • Cross-border B2C sales of goods might be subject to the VAT rate of the Member State of destination of the goods, whereas up until now, it might only be the case when national thresholds are exceeded (up to €100,000 per year). Either the sale price or the seller’s margin will vary.

 

Now let's talk about Brexit and what has been happening on the UK side

 

Brexit refers to the UK-EU withdrawal agreement, which was negotiated and concluded under Article 50(2) of the Treaty on European Union (TEU) and came into force at 11.00 pm (UK time) on 31 January 2020 (exit day), when the UK left the EU.

Generally, rights and obligations arising under the withdrawal agreement are applicable in the UK, and EU law applied to the UK by the withdrawal agreement, is directly applicable in UK law, they have direct effect in the UK (if they meet the usual EU conditions for direct effect), and they have supremacy over conflicting UK law.

The withdrawal agreement consists of six Parts, three Protocols and Annexes.

 

Post Brexit VAT Position

Articles 51 to 53 of the withdrawal agreement deal with ongoing VAT and excise duty matters. For cross-border transactions and movements that started before the end of the transition period, and end afterwards, EU VAT and excise rules continue to apply, subject to the conditions in the withdrawal agreement.

For example, Article 51, which deals with VAT, provides for Council Directive 2006/112/EC (Principal VAT Directive) to apply to cross-border supplies of goods between the UK and EU initiated before the end of the transition period (and delivered after that date) (Article 51(1)).

Taxpayers’ rights and obligations under the Principal VAT Directive in relation to supplies covered by Article 51(1), and to supplies with a cross-border element made before the end of the transition period between the UK and an EU member state, continue for five years after the end of the transition period (Article 51(2)).

However; amendments to VAT returns in respect of one-stop shop services supplied before the end of the transition period must be submitted by 31 December 2021 (Article 51(4)).

 

Other key pointers post Brexit include:

  • The existing rules for imports from non-EU countries now apply to imports from the EU, but with some changes. The government has introduced ‘postponed accounting’ for import VAT on goods brought into the UK with effect from 1 January 2021. This means that UK VAT registered businesses importing goods to the UK can 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.
  • VAT registered UK businesses continue to be able to zero-rate sales of goods to EU businesses. EU member states treat goods entering the EU from the UK in the same way as goods entering from other non-EU countries. This means import VAT and any customs duties (tariffs) are due when the goods arrive in the EU.
  • The supply of services to customers in the EU from 1 January 2021 is treated the same for UK VAT purposes as those to any customer outside the EU. The VAT treatment is covered by the VAT ‘place of supply’ rules. The rules continue to apply broadly as they did previously.
  • Since 1 January 2021, all supplies of digital services to consumers in EU member states have been liable for VAT in the consumer’s member state. The £8,818 annual threshold for cross borders sales of digital services to EU consumers no longer applies. Organizations have to charge VAT at the rate where the customer is based and declare those sales to the relevant EU member state.
  • Prior to the end of the transition period, a UK business could recover VAT incurred in other EU countries using an electronic system. However, businesses are no longer able to use that system. UK businesses can claim refunds of VAT from EU member states, but it will need to be done using the existing refund system for non-EU businesses.

Our opinion is that tax and legal advice needs to be taken at the earliest possible opportunity, e.g., in VAT matters, the current changes to the VAT system by BREXIT may result in a significant cash flow disadvantage for importers into the UK. 

This stems from the fact that, currently, acquisition VAT is accounted for on goods acquired from another member state in the same accounting period as the VAT can be recovered as input tax. Import VAT is chargeable at the point of import, which may be some time before it can be deducted as input tax. 

The  2021 / 2022 and beyond position remains complex despite several pronouncements from the UK tax authorities, what is clear however is that EU type practice and procedure will remain relevant to UK taxpayers.

 

Mikhail Charles
HTJ Tax

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