Brexit – VAT implications for your business
Now that the results of the EU referendum have started to sink in, what impact will Brexit have on VAT for your business?
Well, where any increases in VAT are concerned, last year's Summer Budget the government introduced a 'triple tax lock' effectively freezing taxes for the current parliamentry term (see our article here). Therefore assuming the government sticks to this agreement you're unlikely to see any VAT rises as a result of Brexit in the current parliamentary term. However the government may work round this by changing some of the categories in order to raise taxes. For example items that are currently zero-rated could be altered to become standard rated - so raising the rate of VAT from 0% to 20%. Whilst this could have happened whatever the result of the referendum, it may be that Brexit is used as the rationale to effectively 'hike' some VAT rates through the back door.
The only point we can make with any degree of certainty, is that if your business has transactions with European countries, there will be a number of VAT implications as a result of Brexit.
So what kind of implications are we talking about?
Well once Brexit is formalised we'd anticipate that goods being brought on from a EU country will be subject to import VAT and duty. Conversely goods that are exported from the UK to an EU country would be subject to import VAT and duty in that EU country.
Broadly speaking if you're a UK VAT registered business supplying goods or services to another VAT registered business in a EU country, at the moment these transactions are VAT-free (though see below). Unfortunately post-Brexit, you can no longer expect to benefit from this simplified process.
Another VAT simplified EU transaction likely to change is where you make sales to non-VAT registered customers within the EU. Currently, if you make modest sales then you're not required to register for VAT in that country. However if (or when) the UK is no longer part of the EU, either your customer will be responsible for import VAT and import duty, or you'll be required to register for VAT in the relevant EU country.
What about services bought and sold between the UK and EU countries?
As a general rule most services between the UK (which is currently a EU country) and EU countries are currently free of VAT in the hands of the supplier. Likewise, services between the EU and non-EU countries are VAT-free (for the supplier). Therefore when the UK becomes a non-EU country post Brexit, we'd expect these rules to be largely unchanged.
In terms of services, digital traders are the group of businesses most likely to be affected by VAT and Brexit. On 1 January 2015 new rules were introduced changing how VAT was accounted for in respect of digital services. These changes were introduced by the EU and followed by the UK. This caused a major headache for UK businesses providing digital services and so with Brexit these rules might now be addressed. One change might be that the UK could now be able to drive through its plans to introduce an EU-wide threshold to exclude small businesses from these rules.
What about claiming VAT charged by other EU countries?
It should still be possible to recover VAT incurred in EU countries after Brexit, however from an administrative perspective there could be timing differences for claim deadlines which would prove to be a headache, particularly where the cash-flow for your business is concerned.
What about VAT and penalties?
The VAT penalties here are largely set by the UK and are consistent with those of other taxes so we don't anticipate any changes as a result of Brexit.
We hope this has clarified some of the issues surrounding VAT and Brexit in general. However, if you do have any questions relating to any of the points raised simply email our friendly tax adviser firstname.lastname@example.org or give us a call on 01202 048696.