Trade between the EU and the UK will be impacted severely, most notably due to changes to harmonised indirect taxes, such as VAT. When EU law ceases to apply, which is currently projected to be after the transitional period, the UK will be treated as a third country instead of a Member State for VAT purposes. This article will provide a legal analysis of the consequences for VAT law.
VAT changes with regard to the supply of services
Business-to-business (B2B) transactions
Currently, reverse charge provisions are provided for to prevent third-country businesses from having to register for VAT purposes in every Member State where supplies of services are made. After Brexit, the system for services supplied by a business in the UK to an Austrian business remains the same, as the reverse charge system is also in place for businesses from third countries. However, the VAT Directive allows Member States to require the appointment of a tax representative for businesses from the UK providing services in the EU. Austria has made use of this option and requires third-country businesses to appoint a tax representative, unless there is an agreement on mutual administrative assistance with that third country. There is no such agreement in place with the UK at present. Consequently, UK business operators are required to appoint a tax representative.
No Austrian VAT will be due on the provision of services from an Austrian business to a business in the UK, as the taxable transaction will be located outside the EU. Nevertheless, one must take account of the sovereignty of the UK to determine the VAT consequences for these kinds of imported services. In particular, the issuer of invoices for B2B services taxable in the UK will have to observe additional UK regulations.
Business-to-consumer (B2C) transactions
From a practical point of view, the system remains the same after Brexit. Namely, when an Austrian business supplies services to a consumer located in the UK, Austrian VAT will remain due for that business, as the supply of services is to be located in Austria. However, when the supply of services is to be located in the UK (e.g. services connected to immoveable property located in the UK), no VAT is due, as the transaction is located outside the VAT zone. After Brexit, services supplied by a UK business to an Austrian consumer will be governed by UK tax law.
VAT changes with regard to the supply of goods
Business-to-business (B2B) transactions: imports into the EU
Before Brexit, the supply of goods from and to the UK to or from the EU is not considered an import or export, but rather an intra-EU supply. The B2B supply of goods is to be treated as two separate supplies. The first supply, the intra-Community supply, is exempted for the supplier, while the input VAT remains deductible. The second supply, the intra-Community acquisition, will then be considered a VAT liable transaction, for which the taxable amount is everything which constitutes consideration obtained or to be obtained by the supplier in return for the supply or, in the case of intra-Community transfers within businesses, the purchase price or cost price. This must be reported on the acquirer's (periodical) VAT return as both output and input tax. Both the supplier and the acquirer must declare this transaction in their recapitulative statements. The movement of goods must also be submitted in the Intrastat system.
After Brexit, when the UK becomes a third country, the flows of goods to the EU will be treated as imported goods, which is also a taxable VAT operation. To qualify as imported goods, the goods must be located in the UK at the time of Brexit and be releasable for free circulation for customs purposes. VAT will only be due after these goods have been put into circulation in accordance with customs legislation. In principle, the importer of the goods will have to pay the VAT. However, the parties may agree that the supplier established in the UK will assume the VAT obligations. This means that the supplier will have to have a VAT number or a permanent representative in the country of the acquirer. In this case, a specific location rule for VAT purposes applies: if goods from the third country enter the European territory and the UK supplier owes the VAT, the goods will be deemed to be delivered in the importing country (i.e. in Austria).
While no recapitulative statements and Intrastat submissions must be made, both a VAT return (including import VAT and the corresponding input tax) and import (EU) and export (UK) declarations for customs purposes will have to be submitted. Additionally, if a non-resident supplier (EU or UK) makes a taxable supply in Austria, the recipient, if it is a corporation under public law or an ordinary business, must withhold the VAT and pay it for the foreign business supplier.
As the UK will now be considered a third country, several changes must be noted with regard to chargeability, the taxable amount and the refund procedure.
- Businesses must be aware that VAT is due with regard to the import of such goods and therefore needs to be declared when the customs debt is incurred (i.e. at the time of customs declaration). Nevertheless, importers are allowed to include the import VAT in their periodical tax returns if: (i) the business is subject to VAT in Austria and the goods are imported for its enterprise, and (ii) the importer declares in the customs declaration that it makes use of this arrangement.
- Unlike intra-Community acquisitions, the taxable amount is not the consideration for the supply, but rather the customs value of the goods plus import duties, the cost of customs formalities and certain other costs. The taxable amount is thus higher than in the case of intra-Community acquisitions, as no import duties are to be levied in such a situation.
- When the UK leaves the EU, business operators who do business in the EU and wish to get a tax refund must now do so within a shorter period. The refund application must be submitted within six months of the end of the calendar year in which the right to the refund arose. This means a shortening of the application period by three months compared to the situation within the EU. Moreover, as there is no certainty with regard to the future of the UK's VAT system, refunds by Austrian businesses should be made before the end of the transitional period, i.e. before 31 December 2020. Additionally, businesses operating in the UK applying for a tax refund must now do so directly in the Member State of refund instead of their own country, as this is only possible for businesses established in the EU.
Business-to-business (B2B) transactions: exports to the UK
Supplies of goods to third countries, such as the UK after Brexit, are exempt from VAT with deductibility of the input VAT for the Austrian supplier if the exporting business can prove that the goods have left the EU and that they were transported or dispatched by or on behalf of the vendor or a customer not established within the EU. The Austrian Financial Ministry has devised goodwill rules for the movement of goods around the time of Brexit. However, Austrian suppliers must take into account that when the UK becomes a third country, it will also regain its sovereignty over VAT and will be able to introduce a similar consumption tax, which may also become chargeable on exports to the UK. The UK already has adopted certain legislative measures amending the UK VAT Act to ensure that the VAT regime in the UK will continue to function properly.
Business-to-consumer (B2C) transactions
After Brexit, the supplies of goods from the UK to Austria will remain subject to VAT as imports. Nevertheless, in Austria, an exemption exists for certain goods whose value does not exceed EUR 22 and certain other products, such as a certain amount of tobacco or alcohol if imported in a traveller's personal luggage. With regard to exports to the UK, certain exemptions also exist for the supply of goods related to goods carried in the luggage of non-resident British consumers. Furthermore, the special scheme for intra-Community acquisitions for farmers, for taxable persons not entitled to deduct input tax and for non-taxable legal persons is no longer usable by these persons. These transactions will now be taxed as imports regardless of the yearly imported value of the supplies.
Procedral and administrative changes
After Brexit, it will no longer be possible to determine the entrepreneurial status of the UK business partner by means of a VAT number. Moreover, businesses from the UK doing business in the EU are now obliged to appoint a tax representative, instead of it being voluntary, which increases the administrative burden and costs for UK businesses. Furthermore, even though changes to customs procedures are out of the scope of this article, it is important to emphasise that businesses which import or export goods from or to the UK must get accustomed to the procedures in the field of customs and customs controls.
In individual cases, further changes must be taken into account. For instance, (i) the MOSS regulation (regarding Mini-One-Stop-Shop) or TOMS regulation (regarding the tour operators margin scheme) would not be applicable for services delivered in the UK; (ii) so-called "catalogue services" (including consulting activities, advertisement, etc.) to consumers would now be taxable in the UK; (iii) the special rules for intra-Community carriage of goods and intra-Community in-flight supplies / restaurant services would no longer be applicable; and (iv) businesses will no longer be able to benefit from the simplified procedures for triangular situations.
As there will be many big changes with regard to the VAT treatment of transactions involving the UK, everybody in a business relationship with a UK nexus needs to be aware that these changes will also impact their situation.
Authors: Tobias Hayden and Rik Baete