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VAT + imports exports in a post Brexit UK

VAT + imports exports in a post Brexit UK

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VAT + imports exports in a post Brexit UK

  1. 1. Brexit – What does leaving the EU Single Market mean for UK B2C suppliers of goods? White Paper Introduction 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 benefits. 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, and • What steps businesses should be taking now to prepare for Brexit. A Whitepaper by Caroline Heath
  2. 2. 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 References 20
  3. 3. 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 bilateral treaties. What is the Single Market? A White Paper by Caroline Heath3
  4. 4. EU member states The 28 EU Member States (including the UK for now) are: Austria Belgium Bulgaria Croatia Cyprus Czech Republic Denmark Estonia Finland France Germany Greece Hungary Ireland Italy Latvia Lithuania Luxembourg Malta Netherlands Poland Portugal Romania Slovakia Slovenia Spain Sweden United Kingdom A White Paper by Caroline Heath4
  5. 5. 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
  6. 6. 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. Austria Belgium Bulgaria Croatia Cyprus Czech Republic Denmark Estonia Finland France Germany Greece Hungary Ireland Italy Latvia Lithuania Luxembourg Malta Netherlands Poland Portugal Romania Slovakia Slovenia Spain Sweden United Kingdom European Union European Free Trade Association Switzerland European Economic Area Customs Union Iceland Liechtenstein Norway Andorra Monaco Turkey A White Paper by Caroline Heath6
  7. 7. 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 purposes. The VAT Territory of the Single Market comprises: The VAT Territory of the Single Market Member State Including… But excluding… Austria Jungholtz and Mittelberg Belgium Bulgaria 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 Croatia Czech Republic Denmark the Faroe Islands and Greenland Estonia Hungary Finland the Åland Islands France Monaco Martinique, French Guiana, Guadeloupe, Reunion and St Pierre and Miquelon Germany the island of Heligoland and Büsingen
  8. 8. 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 Oros) Ireland Italy Campione d’Italia, the Italian Waters of Lake Lugano and Lvigno Latvia Lithuania Luxembourg Malta Netherlands Antilles Poland Portugal the Azores and Madeira Romania Slovakia Slovenia Spain the Balearic Islands the Canary Islands, Ceuta and Melilla Sweden 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. 9. 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 of goods. 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 VAT Territory.
  10. 10. 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 arrival. 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 are dispatched. 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
  11. 11. How is VAT accounted for on distance sales? 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 rate. 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 £70,000. 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 Example 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.
  12. 12. Distance sales reporting requirements A White Paper by Caroline Heath12 Type of Movement VAT Return EC Sales List Intrastat Supplementary Declaration Notes Distance sales from UK below threshold in Member State of arrival. box 1 - output tax. box 6 – value of supply. No Yes – as a dispatch. Treated as a UK domestic supply for VAT purposes, but must still be declared on the Supplementary Declaration. Distance sales from UK on or above threshold in the Member State of arrival. boxes 6 and 8 – value of supply. No Yes – as a dispatch. Although VAT is chargeable on the supply in the Member State of the arrival, the value must still be declared on the UK VAT Return and Supplementary Declaration.
  13. 13. 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 Hard Brexit of the Brexit negotiations with the EU. However, Article 50 (3) of the Lisbon Treaty3 only 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.
  14. 14. 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 process before. 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 : Hard Brexit 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.
  15. 15. A White Paper by Caroline Heath15 Hard Brexit 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 two-year period. 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 Brexit negotiations6 includes the following under its core principles:
  16. 16. A White Paper by Caroline Heath16 Hard Brexit 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.
  17. 17. What is the potential impact of a Hard Brexit? 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 cross-border. 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
  18. 18. 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 ahead now: 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 concluded. If you would like assistance in identifying VAT risks which Brexit poses to your business, please do not hesitate to contact us.
  19. 19. Caroline Heath, VAT Knowledge Director, RBCVAT Limited Email: caroline.heath@rbcvat.com Tel: +44 (0) 1189 885797 Twitter: @RBC_VAT Linkedin: Caroline Heath About the author Professional experience: Caroline has vast experience in VAT: 15 years with BT plc – 3 years accountancy, 12 years VAT 1 year VAT Manager at HypoVereinsbank 4 years VAT Knowledge Director at rbcVAT Professional credentials: 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.
  20. 20. References 1. https://www.gov.uk/government/publications/prime-ministers-letter-to-donald- tusk-triggering-article-50 2. https://www.theguardian.com/politics/2017/may/01/jean-claude-juncker-to- theresa-may-on-brexit-im-10-times-more-sceptical-than-i-was-before 3. http://www.lisbon-treaty.org/wcm/the-lisbon-treaty/treaty-on-european- union-and-comments/title-6-final-provisions/137-article-50.html 4. https://www.gov.uk/government/uploads/system/uploads/attachment_data/ file/589191/The_United_Kingdoms_exit_from_and_partnership_with_the_EU_ Web.pdf 5. http://ec.europa.eu/info/news/introductory-comments-michel-barnier_en 6. http://www.consilium.europa.eu/press-releases-pdf/2017/4/47244658130_ en.pdf 7. http://www.consilium.europa.eu/press-releases-pdf/2017/4/47244658130_ en.pdf 8. http://www.consilium.europa.eu/press-releases-pdf/2017/4/47244658130_ en.pdf

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