Post-Brexit VAT: a minefield both sides of the Channel

30 September 2020: As the Brexit transition period nears its end, businesses in the UK and EU face a number of VAT issues that need to be addressed, says indirect tax expert Stephen Dale, FCA.

Of all the issues and considerations around the end of the Brexit transition period on 1 January, VAT could be particularly knotty for both UK and EU businesses. Like most Brexit-related issues, there will be an increased administrative burden. There are also complications around VAT claims, new legislation and the individual VAT regimes of EU Member States. 

There are still more unknowns than knowns, explains Stephen Dale FCA, indirect tax expert with French firm Hedeos Société d’Avocats. With a client base of domestic French businesses, UK and global companies supplying goods and services into, within and out of France, he has a view of the issues from both sides. 

French firms’ attitudes to the looming end of the transition period range from complete indifference to growing concern. Larger businesses are either hiring customs agents or brokers or engaging with third parties – they believe they can adapt to whatever changes. Smaller businesses, however, do not seem to have fully taken on board the implications. A ‘wait and see’ approach is still prevalent, although French Customs is now gearing up its communication campaign to make business aware and ensure they are prepared. 

French Customs, as part of its communication campaign, has been demonstrating how its IT system works (frontière intelligente or ‘intelligent border’), and it has been heavily tested, says Dale, but there is less confidence in the UK authorities being ready in time for January. Extra capacity has been added at Calais to handle additional issues such as veterinary checks.

Unlimited liability issue

For UK businesses, the French VAT system may well be quite complicated. To comply, several key issues need to be addressed. First, there’s domestic French VAT legislation, which states that non-EU businesses making supplies for VAT purposes, not subject to a reverse charge in France, need to appoint a French tax representative to operate in France. That tax representative is liable for any unpaid or undeclared VAT that’s due on that non-EU company’s activities.

“Trying to find businesses which must be tax resident and accredited in France that will act as tax representatives is not that easy, because of the unlimited liability of the tax representative,” Dale explains. “Even in relation to transactions, the UK company might carry out that the tax representative is unaware of. It's a big responsibility and a big risk. It is practically impossible to get insurance for. French insurance companies will generally not cover that risk as you can't calculate the potential exposure.”

Dale has been liaising with the French administration to encourage the adoption of an arrangement similar to that with India. Indian businesses making supplies for VAT purposes in France are exempt from the VAT tax representative rule. For that to happen, French law needs to change. 

“Countries that can avoid having their businesses being required to appoint tax representatives are set down in a ministerial decree,” says Dale. “Adding the UK to that list would require a new ministerial decree. That's not been done so far”.

Dale says that France has not seen an influx of UK businesses trying to organise tax representatives. It’s currently uncertain whether that will be a requirement for trading after 1 January. 

Cross-border VAT claims

Then there’s the matter of claiming cross-border VAT. Currently, UK firms incurring VAT in EU countries can claim that VAT back (subject to national rules) via HMRC’s portal. That arrangement will be in place until 31 March 2021, after which time, there is currently no provision in place to claim for VAT incurred in 2020, under the terms of the Withdrawal Agreement. 

“Outside of that time limit, in principle, you can't make a claim. That's what the Withdrawal Agreement says. Now, with the current situation with COVID, businesses have not even started thinking about it,” says Dale.

We are likely to see a situation where businesses have only three months to claim their 2020 non-UK VAT back. This also applies to EU companies incurring recoverable VAT in the UK. Three months is not a huge amount of time to get VAT sorted, says Dale. Larger businesses have indicated that there is no way, with all of the documentation required, that they will be ready by the 31 March deadline.

“We're telling clients now: don't leave it until 31 of March next year to claim, if you are a French business, your UK VAT back, or for a UK business to claim your EU VAT back. Do it now because if you don’t, it will be too late.”

“From 1 January 2021, any French VAT incurred by a UK business, from that date, which is refundable in France, will have to be recovered under the 13th VAT Directive, for which a tax representative in France will be required, I understand.”

E-commerce impact

For e-commerce businesses, there is quite a bit of new EU legislation in the pipeline which will impact UK firms selling into the EU after 31 December 2020. For example, the EU VAT e-commerce package will come into effect on 1 July 2021 and will impose new reporting and filing obligations on non-EU companies selling small value goods to non-VAT registered customers within the EU. 

In effect, this means that for many UK businesses involved in e-commerce, the VAT system will change three times in just over six months. “UK businesses don't always seem to be aware of this,” says Dale. “They're potentially facing three different VAT systems, if they are involved in e-commerce, in a short period of time, with consequences in terms of costs, complexity and compliance.”

Insurance and financial services

Finally, the European Commission is considering removing the exemption from VAT for insurance and financial services. By removing that exemption, European Union banks and insurance companies will be able to recover far greater amounts of their input VAT and potentially reduce other taxes affecting the finance and insurance sectors. 

“It would put them, therefore, in a much better competitive position compared to their counterparts in the UK. One thing I would strongly suggest to clients operating in the EU and the UK is to keep up to speed on what's going on at EU level. Because the EU changes, if they do take place, potentially, will affect UK businesses and not necessarily in their favour.”

“The UK is also looking at this area, so financial institutions and their advisers will need to keep an eye on developments on both sides of La Manche”.

This is just a flavour of the issues that could arise around VAT. Companies on both sides of the Channel should add them to their growing Brexit to-do lists before it’s too late. 

ICAEW has prepared a quick-start guide for businesses

preparing for the end of the transition period. For more details click here.

Find a range of resources to help you prepare for future trade during the post-Brexit transition period on ICAEW’s Brexit Hub.