31 Dec 2020 exit from EU VAT regime, Customs Union and Single Market
Under the terms of the WA, the UK will have an exit transition period until 31 December 2020. Until this time, the UK will remain within the EU VAT regime, Single Market and Customs Union.
The UK will continue to apply EU law during this period, with a few exceptions, as if it were a Member State. But the UK will have no institutional representation and no role in decision-making. The EU institutions and other bodies, offices and agencies will continue to exercise their powers under EU law in relation to the UK. The CJEU will have jurisdiction in relation to the UK and to the interpretation and application of the Withdrawal Agreement.
The UK will leave the EU VAT regime on 31 December 2020.
During the transition period, the EU and UK will seek to negotiate a Free Trade Agreement. This will include future tariffs and customs controls on the movements of goods. However, this will not materially affect the post-2020 VAT changes. The UK will become a 'third country' for the purposes of EU VAT.
Brexit VAT Changes
The major changes for UK and EU businesses upon the UK leaving the VAT regime include:
- The UK will no longer have to assume the EU VAT Directive rules into its own VAT Act. For example, it will no longer have to maintain a minimum VAT rate of 15%. However, since its VAT rate is 20%, and the consumption tax accounts for almost a third of tax revenues, any reduction is highly unlikely.
- The UK will have complete control over its reduced VAT rates, which are currently restricted within the rules of the EU VAT Directive. Although this may be a moot point from 2022 as the EU states have agreed that they will enjoy full rate setting powers.
- The ending of zero-rated B2B intra-community supplies; all movements will become imports or exports, subject to UK or EU import VAT.
- By way of compensation, the UK will introduce a Postponed Accounting import VAT deferral scheme so no cash VAT payment has to be made by business importers to UK customs. However, many EU countries do not offer the same scheme for UK businesses importing their goods.
- Any UK business with a foreign VAT registration in the EU may now face the obligation to appoint a special VAT fiscal representative. This applies in 19 of the 27 EU states. These agents hold direct liablity for any unpaid VAT, and therefore require cash deposits or bank guarantees in exchange.
- The scrapping of the UK £15 low-value consignment stock relief which exempts imports of goods from VAT. Instead, for goods at £135 or below, sellers or their postal service will have to declare and pay to HMRC via a new, quarterly filing, VAT charged at the point-of-sale.
- There will be limited changes on the VAT on services for B2B transactions after the UK leaves the EU VAT regime. The reverse charge will still apply. in the future, the UK may deviate from some of the use and enjoyment rules.
- UK businesses incurring EU VAT on travel, hotel or other expenses will no longer be able to use the 8thDirective online VAT reclaim system operated via HMRC. Instead, they will use the 13th Directive paper-based reclaim process. This requires individual claims to each country where there is a VAT claim. Last UK claims via the 8th Directive will be for the final quarter of 2020.
Northern Ireland Brexit VAT regime will take-up a special dual position.
- As part of the WA, Northern Ireland (NI) will enter into a special VAT and customs relationship with the EU. Whilst NI will remain within the UK VAT area, it will track EU rules, including zero-rating for VAT on intra-community supplies across the Irish border. EU VAT on imports into Ireland via Northern Ireland will be collected by the UK authorities.
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