Are you ready? How does Brexit affect you in relation to VAT?

on December 2, 2020

Conversations steered away from a deal or no-deal regarding Brexit and suddenly face masks and hand sanitisers were the main topic of discussion, as a global pandemic presented itself. Undoubtedly, covid-19 posed a great threat to our society and forcefully claimed all aspects of people’s lives, from employment and travel to social gatherings and family life.  Now as we slowly come closer to a vaccine and start thinking of a life beyond COVID-19 we now need to deal with the inevitable new way around post-Brexit systems. We must not forget that a deal is done, or no deal is done we are leaving EU and there will be more regulatory and paperwork that will be added.

Brexit will have less impact on suppliers of B2B services, but the impact for B2C is rather different. Suppliers of B2C services, along with distance sellers of goods, are more likely to face the prospect of multiple VAT registrations. But if not for Covid-19, the One-Stop Shop (“OSS”) would have come to the rescue. OSS is an extension of the Mini One Stop Shop (MOSS) to:

  • all B2C services where the place of supply is an EU country and
  • distance selling.

OSS has largely escaped attention in the UK because the changes needed were introduced by the EU after the 2016 referendum. Its scheduled implementation from 1 January 2021 has been deferred to 1 July 2021 because of the pandemic. A similar extension of the UK’s transition period could have reduced a great deal of temporary red tape.

One of the key areas that will be affected is “Electronically supplied services” which includes almost everything supplied digitally from web hosting, games, software, music, and films, to distance teaching. The service will normally be delivered over the internet and without the need for human intervention.

The place of supply of these services is where the customer “is established, has his permanent address or usually resides”.

Now

VAT is currently accounted for on these services through MOSS. Currently, UK suppliers can either:

(a)  Register for VAT in each country where they supply such services, or

(b)  Use MOSS.

Where they use MOSS, they account for VAT on all their B2C digital services to HMRC and at the rate applicable in each of their customer’s countries. HMRC passes the tax on to the appropriate tax authorities. There have been special rules since 1 January 2019 enabling suppliers with an annual turnover of less than £8,818 to account for UK VAT on all their supplies.

After Brexit

From 1 January 2021, UK B2C suppliers of digital services have the following choices:

  • If they are established, or have a fixed establishment, in an EU country, then they can switch from the UK scheme to the “Union scheme” under MOSS in that country.
  • They can use MOSS by registering for the “non-Union scheme” in an EU member state of their choice by the 10th day of the month following their first sale to an EU individual customer.
  • They can register for VAT in each and every EU country in which they make B2C supplies of digital services.

Under either of the MOSS options, the supplier will account for VAT to the tax authority in the member state concerned, along the same lines as they do to HMRC now.

Whatever option they choose, they will need to make changes effective from 1 January 2021 if they are to remain in these markets.

From 1 July 2021 for “MOSS” read “OSS”. The option of multiple registrations will still be available.

B2C Intangibles

Now

Several intangible B2C services are treated as supplied where the customer is based if the customer is based outside the EU. The list of these services is extensive and includes consultancy, legal and accountancy services, and the hire of goods other than means of transport. In practice, this means UK suppliers charge UK VAT on these services if the customer is in the EU, but not otherwise.

After Brexit

From 1 January 2021 UK B2C suppliers will only charge UK VAT on these services if the customer is based in the UK.

However, a UK supplier of such a service to a non-business-person in the EU would be required to register in the EU country where the customer was based. This would apply, for example, to a UK-based accountant providing tax advice to an English couple that had permanently moved to France. The accountant would have to register for VAT in that country. Again, the OSS should obviate any need for multiple registrations after 30 June 2021.

Use or enjoyment

For completeness, it should be noted that the UK currently has a “use or enjoyment” rule in relation to certain services. Where the normal place of supply rule puts a service outside the EU, but it is used or enjoyed in the UK, the rule flips the place of supply into the UK. The reverse can apply but the use or enjoyment rule cannot change the place of supply from one EU country to another EU country. The B2C services included are:

  • The letting on hire of goods, including means of transport
  • Radio and TV broadcasting

Presumably, the rule will be modified after Brexit to flip services from the UK to outside the UK, or vice versa, where appropriate.

Distance selling

Now

Distance selling for EU VAT purposes refers to the situation where a supplier in country A sells goods to non-VAT-registered persons in country B and arranges the transport of those goods to those customers. The place of supply of the goods is as follows:

(a)  Unless the supplier opts to be VAT-registered in country B, the supplies are subject to VAT in country A until the distance selling threshold in country B is exceeded; and

(b)  Once that threshold is exceeded, the supplier must register for VAT in country B and account for VAT in that country.

After Brexit

From 1 January 2021, a UK distance seller would normally be the importer of record in each country to which it sent its goods and would need to register and account for VAT in each of those countries. From 1 July 2021 the OSS should be available to distance sellers. OSS has already been deferred six months because of Covid-19 and distance sellers will already have enough to contend with in adjusting to the new customs regime. However, once things have settled after 1 January 2021, they may wish to investigate whether OSS might make their lives simpler, as it could mean just one EU VAT registration from 1 July 2021.

There are special rules relating to distance sales of goods sold through an “electronic interface”.

VAT returns after 31 December 2020

I have seen suggestions that UK VAT returns might need fewer boxes after Brexit. This seems to me unlikely unless the NI Protocol is jettisoned. If NI remains part of the EU for VAT in relation to the supply of goods, there are not even one of the 9 boxes that would not be needed.

Are you ready? How does Brexit affect you or your clients in relation to VAT? While there are questions still to be answered and so much could change, have you done what you can to get ready? Give us a ring to discuss further

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