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Brexit – What does leaving the
EU Single Market mean for UK
B2C suppliers of goods?
Article 50 of the Lisbon Treaty was triggered by
the UK on 29th March 2017 formally starting
the Brexit process1
. Early indications are the
forthcoming Brexit negotiations could be a
fraught process. The UK Government and EU27
are seemingly unable to agree on what they
should actually be discussing and Jean-Claude
Juncker is reportedly putting the chances of the
Brexit talks failing at “over 50%”2
Businesses must hope that any differences in
opinion can be quickly resolved so constructive
discussions can commence shortly after the UK
general election. Only time will tell whether a
trade deal can be agreed between the parties
before March 2019, when the UK will officially
leave the EU.
It is the present UK Government’s intention for
the UK to leave the Single Market. Being in the
Single Market, however, offers businesses many
This White Paper looks at the potential
implications of the UK leaving the Single
Market for UK businesses involved in the
intra-EU business to consumer (B2C) supply of
goods from a VAT and customs perspective. In
particular, we analyse:
• What is meant by being in the Single Market
and Customs Union
• How VAT is accounted for on B2C sales and
the distance selling VAT rules
• What the impact of leaving the EU could be,
• What steps businesses should be taking now
to prepare for Brexit.
A Whitepaper by Caroline Heath
Table of contents
What is the Single Market? 03
EU Member States 04
What is a Customs Union? 05
The EU Customs Union 06
The VAT Territory of the Single Market 07
B2C cross-border supplies of goods within the VAT territory 10
How is VAT accounted for on distance sales? 11
Distance sales reporting requirements 12
Hard Brexit 13
What is the potential impact of a Hard Brexit? 17
What can businesses do now? 18
About the author 19
The Single Market, also known as the Internal
Market, is the means by which countries inside
the EU allow the free movement of goods, people,
services and capital between one another. These
are the so-called Four Freedoms.
This free movement is made possible by the:
1. Removal of barriers to trade, such as tariffs or
taxes on imports and border controls; and,
2. Harmonisation of national rules at EU level.
Therefore, the EU is a single territory without
any internal borders or other regulatory
obstacles to the free movement of goods,
services, people and capital.
Access to the Single Market has been extended
to non-EU countries Iceland, Liechtenstein and
Norway via the agreement on the European
Economic Area and to Switzerland through
What is the Single Market?
A White Paper by Caroline Heath3
EU member states
The 28 EU Member States (including the UK for now) are:
A White Paper by Caroline Heath4
A Customs Union is a form of trade agreement
under which a group of countries grant tariff-free
market access to each other’s imports and agree to
the application of a common set of external tariffs
to imports from the rest of the world. It is this
imposition of common external tariffs on imports
from non-member countries that distinguishes a
Customs Union from a Free Trade Area.
What is a Customs Union?
A Free Trade Area allows member states to trade
freely with each other while still being able to set
their own tariffs on goods imported from the rest
of the world.
Customs Unions reduce barriers to trade such as,
customs border checks and charges, and so make
it much easier for businesses to trade goods cross-
border within that Customs Union. However,
the freedom of individual members is limited
since they are not permitted to strike their own
trade deals with non-member countries and are
required to apply the common external tariff.
Goods & Services Goods & Services
A White Paper by Caroline Heath5
The EU Customs Union comprises the 28 EU
member states and Monaco. All goods which have
been imported into any of these countries can
subsequently freely move around the EU Customs
Union without further customs checks or the
payment of import VAT and customs duty.
The EU also has Customs Union Agreements with
Turkey, Andorra and San Marino, though the scope
of these vary. Therefore, it is clearly not necessary
to be a member of the EU’s Single Market to be in
a Customs Union with the EU.
Then there is Norway. Norway is part of the
European Economic Area (EEA), which gives
it access to the Single Market, but is not in a
Customs Union with the EU.
The EU Customs Union
In practice this means that, while most goods
which originate in Norway can still be traded
tariff-free to the rest of the European Single
Market, products coming through Norway into the
Single Market are subject to further checks.
The EU Customs Union is one of the mechanisms
which helps achieve free trade in goods - one of the
Four Freedoms of the EU - between member states.
A White Paper by Caroline Heath6
7 A White Paper by Caroline Heath
The VAT Territory of the EU, sometimes referred
to as the Fiscal Territory, refers to the territories
which are considered within the EU for VAT
The VAT Territory of the Single Market comprises:
The VAT Territory
of the Single Market
Member State Including… But excluding…
Austria Jungholtz and Mittelberg
Cyprus the British Sovereign Base Areas of
Akrotiri and Dhekelia
the United Nations buffer zone
and the part of Cyprus to the
north of the buffer zone, where
the Republic of Cyprus does not
exercise effective control
Denmark the Faroe Islands and Greenland
Finland the Åland Islands
France Monaco Martinique, French Guiana,
Guadeloupe, Reunion and St Pierre
Germany the island of Heligoland and
8 A White Paper by Caroline Heath
The VAT Territory
of the Single Market
Member State Including… But excluding…
Greece Mount Athos (also known as Agion
Italy Campione d’Italia, the Italian
Waters of Lake Lugano and Lvigno
Portugal the Azores and Madeira
Spain the Balearic Islands the Canary Islands, Ceuta and
United Kingdom the Isle of Man the Channel Islands and Gibraltar
Other areas not within the VAT Territory include
Liechtenstein, the Vatican City, Andorra and San
Marino. Therefore, there are differences between
the composition of the EU Customs Union
territory and the VAT Territory.
9 A White Paper by Caroline Heath
The VAT Territory
of the Single Market
It is important to understand the composition of
the VAT Territory because:
a. Movements of goods between the UK and
any of the above countries, or their included
territories, are treated as intra-EU supplies for
VAT purposes; whereas,
b. Movements of goods between the UK and
any of the excluded territories are treated as
imported or exported goods for VAT purposes.
The entry into the EU of goods coming from
outside the VAT Territory of the EU but from a
territory forming part of the Customs Union of the
EU, must therefore be regarded as an importation
The VAT liability and associated compliance
obligations relating to a cross-border sale of
goods differ depending on whether they are being
exported and imported or supplied within the EU
A White Paper by Caroline Heath10
Cross-border supplies of goods within the VAT
Territory are not referred to as imports and
exports, such that:
• Goods entering an EU Member State from
another EU Member States are called
Acquisitions (or Arrivals).
• Goods leaving an EU Member State to go
to another EU Member States are called
Dispatches (or Removals).
VAT on goods traded between EU Member States
is not paid at the border as import VAT. The
way VAT is accounted for on intra-EU supplies
depends on whether the recipient of the supply
is registered for VAT in the EU Member State of
Where the customer in another EU country is
a private individual or is not registered for VAT,
VAT is normally charged and accounted for by the
supplier in the EU country from which the goods
Within the EU, special VAT rules apply to distance
sales. Distance sales are sales of goods to non-
taxable persons in other EU countries where the
supplier is responsible for delivery.
B2C cross-border supplies of goods
within the VAT territory
How is VAT accounted for on
The distance selling VAT rules were designed to
create a level playing field within the EU since
there would be distortion of competition if a
consumer located in a high VAT rate jurisdiction
could choose to purchase goods from a supplier
established in a Member State with a lower VAT
rate and only be charged the lower overseas VAT
Under the distance selling regime, a supplier based
in one EU country becomes liable to register for
VAT in the Member State of its overseas customer
once an annual threshold has been exceeded.
Under EU VAT law, each Member State can choose
a distance sales threshold of either €35,000 or
€100,000 (or the relevant equivalent in their own
currency). Currently only Germany, Netherlands
and Luxembourg apply the €100,000 threshold
and the UK has the equivalent threshold of
Prior to the threshold being exceeded, customers
are charged VAT of the EU country from which the
EU supplier is fulfilling the sales.
A White Paper by Caroline Heath11
A UK business selling goods
delivered from the UK to
consumer customers located in
Italy would charge 20% UK VAT
on its sales up to €35,000.
Once annual sales to customers
in Italy have exceeded the
Italian €35,000 distance sales
threshold, the business is
required to register for VAT in
Italy and charge Italian VAT at
22% on future sales to consumer
customers in Italy.
Distance sales reporting
A White Paper by Caroline Heath12
VAT Return EC Sales List
from UK below
Member State of
box 1 - output tax.
box 6 – value of
No Yes – as a dispatch. Treated as a UK
for VAT purposes,
but must still be
declared on the
from UK on or
above threshold in
the Member State
boxes 6 and 8 –
value of supply.
No Yes – as a dispatch. Although VAT is
the supply in the
Member State of
the arrival, the
value must still be
declared on the UK
VAT Return and
A White Paper by Caroline Heath13
The term Hard Brexit is generally accepted to
mean the UK exiting both the Single Market and
the EU Customs Union when it eventually leaves
the EU. The Government has confirmed it intends
to pursue a Hard Brexit strategy. It is possible this
approach could change though depending on the
outcome of the June 2017 general election.
At this point in time, the major unknown is what the
UK’s future trading relationship with the EU will
look like. It is hoped that this can be agreed as part
of the Brexit negotiations with the EU.
However, Article 50 (3) of the Lisbon Treaty3
allows for a two-year negotiation window from the
date of an Article 50 notification until the Member
State formally leaves the EU (unless all parties
agree to an extension).
Article 50 of the Lisbon Treaty
1. Any Member State may decide to withdraw from the Union in accordance with its
own constitutional requirements.
2. A Member State which decides to withdraw shall notify the European Council of
its intention. In the light of the guidelines provided by the European Council, the
Union shall negotiate and conclude an agreement with that State, setting out the
arrangements for its withdrawal, taking account of the framework for its future
relationship with the Union. That agreement shall be negotiated in accordance with
Article 218(3) of the Treaty on the Functioning of the European Union. It shall be
concluded on behalf of the Union by the Council, acting by a qualified majority, after
obtaining the consent of the European Parliament.
3. The Treaties shall cease to apply to the State in question from the date of entry into
force of the withdrawal agreement or, failing that, two years after the notification
referred to in paragraph 2, unless the European Council, in agreement with the
Member State concerned, unanimously decides to extend this period.
A White Paper by Caroline Heath14
4. For the purposes of paragraphs 2 and 3, the member of the European Council or of
the Council representing the withdrawing Member State shall not participate in the
discussions of the European Council or Council or in decisions concerning it.
A qualified majority shall be defined in accordance with Article 238(3)(b) of the
Treaty on the Functioning of the European Union.
5. If a State which has withdrawn from the Union asks to re-join, its request shall be
subject to the procedure referred to in Article 49.
Only time will tell whether reaching a trade
agreement is a realistic ambition within a two-year
time frame since no country has been through this
For business this amounts to great deal of
uncertainty since there is no way of accurately
predicting how negotiations will progress.
The Government’s Brexit White Paper “The
United Kingdom’s exit from and new partnership
with the EU4
” published in February 2017, states :
In leaving the EU, the UK will seek a new customs arrangement with the EU, which
enables us to make the most of the opportunities from trade with others and for trade
between the UK and the EU to continue to be as frictionless as possible. There are
a number of options for any new customs arrangement, including a completely new
agreement, or for the UK to remain a signatory to some of the elements of the existing
arrangements. The precise form of this new agreement will be the subject of negotiation.
A White Paper by Caroline Heath15
Time will be short.
It is clear that the period for actual negotiations will be shorter than 2 years. At the
beginning, the two years include the time to the European Council to set guidelines, and
for the Council to authorise negotiations, based on a recommendation of the Commission.
And at the end, the agreement must, of course, be approved by the Council and the
European Parliament. Finally, the UK will have to approve the agreement. All within the
All in all, there will be less than 18 months to negotiate.
A non-member of the Union, that does not live up to the same obligations as a member,
cannot have the same rights and enjoy the same benefits as a member.
In this context, the European Council welcomes the recognition by the British
Government that the four freedoms of the Single Market are indivisible and that there
can be no “cherry picking”.
When the EU’s principal negotiator, Michel
Barnier, gave his first speech outlining his key
negotiating principles, he said5
The European Council (Art. 50) guidelines for
includes the following under
its core principles:
A White Paper by Caroline Heath16
18. The European Council welcomes and shares the United Kingdom’s desire to establish
a close partnership between the Union and the United Kingdom after its departure.
While a relationship between the Union and a non Member State cannot offer the
same benefits as Union membership, strong and constructive ties will remain in both
sides’ interest and should encompass more than just trade.
19. The British government has indicated that it will not seek to remain in the Single
Market, but would like to pursue an ambitious free trade agreement with the
European Union. Based on the Union’s interests, the European Council stands ready
to initiate work towards an agreement on trade, to be finalised and concluded once
the United Kingdom is no longer a Member State.
20. Any free trade agreement should be balanced, ambitious and wide-ranging. It cannot,
however, amount to participation in the Single Market or parts thereof, as this would
undermine its integrity and proper functioning.
Section IV “Preliminary and preparatory
discussions on a framework for the Union – United
Kingdom future relationship” of the guidelines7
includes the following statements:
The stance taken by the EU clearly suggests it will
be incredibly difficult to come to arrangement
whereby the UK can enjoy frictionless trade with
the full benefits of the Single Market and Customs
Union once it has left the EU.
What is the potential impact of a
As the facts stand now, Hard Brexit is likely
to result in the formation of a customs border
between the UK and the EU. This would almost
certainly result in:
1. The requirement to pay import VAT and
customs duty on the movement of goods
from the UK into an EU member state. This
would result in a negative cash-flow cost
if businesses have to pay import VAT and
then reclaim it at a later date via a local VAT
Return, as well as incurring the additional
cost of irrecoverable duty charges;
2. Additional compliance burdens associated
with the filing of customs declarations; and,
3. An increase in the time taken to clear goods
Taken together these factors could lead to
additional costs and so reduced profit margins,
as well as longer lead times for the physical
movement of goods between the UK and EU.
On the positive side, UK B2C businesses would no
longer have the compliance burden of compiling
Intrastat Supplementary Declarations.
A White Paper by Caroline Heath17
What can businesses do now?
For more information about how Brexit may affect
your business, please contact us on:
http://www.rbcvat.com/ · +44 (0) 1189 885 797
A White Paper by Caroline Heath18
Despite the uncertainty surrounding what Brexit
will mean in practice, businesses can start planning
1. It would make sense to start reviewing and
documenting current physical and legal
supply chains. This will make it easier to
identify where additional costs could be
incurred post-Brexit. Part of this process
should include identifying all current EU VAT
registrations and the reasons for them.
2. Businesses which currently have to comply
with EU trade measures such as distance
selling rules should record these, too. The
loss of these measures as a result of Brexit
may trigger changes to EU VAT registration
requirements, as well as the need to address
issues such as who will act as the importer of
record on future sales into the EU.
3. Consider alternative trading models to assess
whether they could alleviate potential risk
areas. For example, some businesses may
want to start holding stock or establish new
entities in other EU countries from which to
make EU B2C sales.
4. Assess whether existing import and export
processes are robust enough and sufficiently
resourced to cope with the potential increase
in transactions after Brexit.
5. Changes in all these areas would have an
impact on system requirements which will
need to be identified. System development
costs are likely to be incurred when amending
the billing and accounting treatment of
transactions which are currently intra-EU.
Also, the capability to deal with charging
overseas VAT may need to be built-in if new
EU VAT registrations are required.
Businesses should not underestimate the benefit
of conducting thorough reviews now. Doing so
will mean they are well placed to take appropriate
action once the Brexit negotiations have
If you would like assistance in identifying VAT risks
which Brexit poses to your business, please do not
hesitate to contact us.
Caroline Heath, VAT Knowledge Director,
Tel: +44 (0) 1189 885797
Linkedin: Caroline Heath
About the author
Caroline has vast experience in VAT:
15 years with BT plc – 3 years accountancy, 12 years
1 year VAT Manager at HypoVereinsbank
4 years VAT Knowledge Director at rbcVAT
Caroline has considerable experience in industry
and managed BT’s VAT Compliance team. In doing
so, Caroline was responsible for the UK VAT Group
VAT Return which included over 80 group members.
Caroline provided VAT advice within the business,
including on Accounts Payable (AP) and Accounts
Receivable (AR) issues, VAT treatment of new products
and services and property issues.
Caroline has a proven track record of advising on
customer and supplier contracts (both in the UK and
globally) to ensure they were structured effectively,
in particular with a view to eliminating or minimising
cross-border VAT costs and generating VAT savings for
partially exempt customers.
Caroline has dealt extensively with HMRC on matters
including VAT audit queries, obtaining rulings,
negotiating VAT assessment reductions and negotiating
partial exemption special methods.
In response to the VAT challenges commonly
experienced in industry, Caroline has worked effectively
to raise awareness of VAT issues around businesses by
overseeing and delivering training schemes.