The one thing we have been sure of since waking up to the reality of Brexit on 24 June is that, until the UK exercises Article 50, the UK is still a full member of the EU. It will only be once the negotiations end and the UK, in whatever constitutional format, exits the EU, that the VAT rules change.
As Brexit is unlikely to happen before 2019, you could think VAT changes are a problem for another day. However, the Referendum vote overshadowed what is probably the biggest shake up of EU VAT rules since the introduction of the VAT Single Market. Announced in April, the EU's Action Plan on VAT sets out measures to tackle cross border fraud and to adapt the VAT system to the needs of a digital economy.
A key element of these changes is the requirement in cross border supplies for the supplier to charge VAT appropriate to the member state of delivery. That means a UK business selling to business customers in Germany will have to show German VAT on their invoice and account for this VAT on their VAT return. The EU proposes to introduce Legislation in 2017, which means that, before Brexit is introduced, UK business may have to amend their VAT accounting and reporting to show foreign VAT rates on their UK invoices and account for multiple VAT rates on their returns.
After adjusting for the Action Plan changes, then businesses will have to consider Brexit. Post-Brexit, the UK will be classed as a "third country". Cross border supplies, which were previously dealt with as an accounting entry on the VAT returns, will become imports and exports, with the associated Customs clearance requirements. There will be a cash flow impact for VAT, but more importantly, depending upon the agreement reached, there may be an absolute cost arising from positive rates of customs duty applied to goods purchased from EU countries.
Current EU simplifications such as triangulation and call-off stocks will no longer be available to UK businesses such that current supply chains may no longer be efficient and VAT registrations in multiple jurisdictions may be required. Similarly, for UK recipients of certain services, the "use and enjoyment" rules could result in more foreign VAT being incurred.
In addition, the current EU VAT refund scheme which allows for claims to be made by UK businesses via an electronic portal will be replaced by 13th Directive claims. Under this scheme, all claims need to be submitted with original documents and generally have to be in the language of the member state of reclaim.
With UK VAT law no longer being required to be in compliance with the EU Directives, the UK will have more flexibility on how it sets rates and administers the tax. While this could be good news in areas such as the "Tampon Tax" and e-books, as the decisions of the Court of Justice of the European Union cease to be applicable, HMRC may reverse some of the gains made following EU litigation.
So while you may appear to have time to get Brexit ready, that time may not be available.
For more information contact Alistair Duncan, Director, firstname.lastname@example.org