VAT after Brexit

This guidance sets out the implications on VAT from the end of the Brexit transition period.

It’s relevant:

  • for UK law firms and lawyers responsible for ensuring VAT compliance
  • subject to the UK-EU Trade and Cooperation Agreement agreed on 24 December 2020

Introduction

Having exited the transition period at the end of 2020, solicitors should be aware of the following points:

  • the UK has become a ‘third country’ for EU VAT purposes
  • for business-to-business (B2B) supply of services from the UK to the EU, the supply is outside the scope of UK VAT. The business customer in the relevant EU member state self-accounts for VAT under the 'reverse charge' mechanism via their VAT return
  • for business-to-consumer (B2C) supply of services from the UK to the EU, the supply is subject to UK VAT. However, for certain types of supply, special rules apply, including for the supply of legal services
  • the UK government introduced postponed accounting for import VAT on goods brought into the UK, whether from the EU or elsewhere, which came into effect from 1 January 2021
  • generally speaking, all goods entering the UK as parcels sent by overseas businesses will be liable for VAT
  • exporters need to be aware that import VAT and customs processes are expected to apply to goods on entry to the EU
  • for UK businesses supplying digital services to non-business customers in the EU, the ‘place of supply’ continues to be where the customer resides. VAT on services are due in the EU member state in which the customer is a resident
  • for supplies of insurance and financial services to the EU, from 1 January 2021, firms are able to reclaim input VAT related to certain products
  • UK businesses that sell digital services to consumers in the EU and that want to continue to use the MOSS system will need to register for the VAT MOSS non-Union scheme in an EU member state
  • UK businesses continue to be able to claim refunds of VAT from EU member states but in future they will need to use the processes for non-EU businesses

Future framework

Although derived from EU law, the UK VAT system has been implemented in UK primary, secondary and tertiary legislation, in particular the Value Added Tax Act 1994.

The UK government has stated that the UK will continue to have a VAT system after it leaves the EU.

Goods

The EU has become a ‘third country’ for UK VAT purposes, with the VAT rules which currently apply to supplies of goods to and from third countries generally applying to supplies to and from the EU.

However, the UK government recognises that dealing with import VAT from EU imports will create an additional burden and so announced that postponed accounting for import VAT will be introduced for all imports from 1 January 2021. This applies not only to imports from the EU, but to all goods that are imported from outside of the UK.

This provides a valuable cash flow benefit to importers and removes the potential for significant cash flow costs for UK businesses that purchase goods from suppliers in the EU.

HMRC has published further guidance on how to implement postponed accounting.

Several other EU states have similar postponement mechanisms or deferred payment options in place. It's essential for UK businesses to become familiar with these in order to establish the most effective supply chains.

In relation to imports of goods as parcels sent from overseas, low value consignment relief (LVCR) no longer applies to any parcels arriving in the UK, such that all goods entering the UK as parcels sent by overseas businesses will be liable for VAT (unless the goods are, for example, zero-rated).

The government recognises that while UK businesses exporting goods to EU customers will be able to zero-rate their supplies, import VAT and customs processes apply on entry to the EU.

Services

The EU has become a ‘third country’ and the rules for the place of supply of services generally apply as if suppliers of services to an EU customer were to a third country customer (a consumer outside the EU).

B2B services

For VAT treatment of B2B services, the general position is to treat as supplied where the customer is resident.

UK-EU supply of B2B services is consequently outside the scope of UK VAT.

The business customer in the relevant EU member state self-accounts for VAT under the 'reverse charge' mechanism via their VAT return.

The equivalent position applies for services imported by UK businesses with UK VAT accounted for by the business customer under the reverse charge.

B2C services

For VAT treatment of B2C services, the general position is to treat as supplied where the supplier is resident.

So, typically, a UK supplier of B2C services would charge UK VAT to their EU (and non-EU) customers.

Special rules do, however, apply in respect of certain types of B2C services.

In the case of non-land-related legal services in particular, the Value Added Tax Act 1994 flips the place of supply rules for B2C transactions, so that supplies of such non-land-related legal services by a UK lawyer to an EU (or other non-UK) non-business client fall outside the scope of UK VAT.

Specifically affected services

Additionally, the government has suggested that there will be some types of service that may be specifically affected. In particular:

  • for UK businesses supplying digital services to non-business customers in the EU, the ‘place of supply’ continues to be where the customer resides. VAT on services will be due in the EU member state in which the customer is a resident
  • from 1 January 2021, firms are able to reclaim input VAT related to the exports of certain financial services products to the EU, following confirmation by the UK government in November 2020 that the rules for EU exports post-2020 will be brought into line with supplies to non-EU customers – this has been brought into force by a commencement order to give effect to the Value Added Tax (Input Tax) (Specified Supplies) (EU Exit) (No 2) Regulations 2019
  • businesses that sell digital services to consumers in the EU, and that want to continue to use the VAT Mini One Stop Shop (MOSS) system, will need to register for the VAT MOSS non-Union scheme in an EU member state

Refunds

UK businesses will continue to be able to claim refunds of VAT from EU member states but in future they will need to use the processes for non-EU businesses.

These processes vary across the EU and businesses will need to use the processes in the individual countries where they incur costs and want to claim a refund.

The paperwork and the time limits for making claims are likely to be different to the current position.

Bilateral agreements with EU member states

While taxation remains largely a member state competence within the EU, the major exception is VAT (and, to a lesser extent, excise duty).

As a result, it will not be possible for the UK to enter into bilateral agreements in this area.

The harmonisation of indirect taxes is widely accepted as one of the cornerstones of the EU single market.