Tax Manager at RSM Poland
Debates are under way in the United Kingdom on the post-Brexit rules for the relations of the United Kingdom with the European Union. The ultimate arrangements of these relations are not yet known; hence the UK leaving the EU without an agreement is still an option. In the time of publishing this article there is a commonly shared assumption that such scenario will not come true; however, if it proves otherwise, implications for VAT will be involved.
Below I will discuss the consequences based on the assumption that no transitional regulations (neither EU nor domestic) are agreed to simplify the settlement of business transactions with entities from the United Kingdom.
Brexit effects for VAT
After Brexit, the United Kingdom will lose its status of a Member State and will become a third party country for the EU. EU Member States rely on harmonised simplifications in settling EU transactions. This is one of the results of the Single Market; as a rule of thumb, its benefits are enjoyed only by EU members. In other words, these simplifications do not apply to transactions with non-EU entities. Therefore, simplifications provided for in the Community legislation on VAT will simply cease to apply to contractors from the United Kingdom.
Polish VAT payers who conclude transactions with entities from the United Kingdom will have to account for these transactions according to principles that apply to transactions with third party countries:
- So far, Polish taxpayers selling goods to the United Kingdom accounted for this sale as an intra-Community supply of goods, which was taxed with a 0% rate under certain conditions. In practice, in order to apply the 0% VAT rate, all you had to was to obtain a confirmation from the VIES system that the purchaser is registered for VAT UE and to have the CMR document (or a different confirmation of the supply of goods) signed by the purchaser. Once the United Kingdom leaves the European Union, this will be considered as an export and no longer an intra-Community supply of goods. In this case, the application of 0% VAT rate will only be possible if the exporter has an IE599 statement issued by a competent Customs Office. The introduction of such obligations and the need to handle customs applications will generate additional costs for exporters. Goods would probably undergo a customs procedure for introducing them to the United Kingdom’s market, which would extend their delivery time from Poland.
- The UK’s exit from the European Union will make it impossible to apply the convenient solution of a simplified accounting procedure for intra-Community trilateral transactions (Article 135 – 138 of the VAT Act). At present, it is applied if the sale of goods is taking place between three entities from three different EU countries, and the goods are sent directly from the first to the last entity. When a Polish entrepreneur, being the second entity in this chain, purchases goods from the first entity in the chain, they are not obliged to account for this transaction in the register and tax returns in the United Kingdom. As a result of Brexit, such transaction will have to be accounted for according to the principles that apply to chain transactions. Without this simplification in place, it is possible that a Polish entrepreneur will have to register in the United Kingdom for VAT purposes and account for the said purchase and supply there.
- Polish entrepreneurs who make their purchases in the United Kingdom may face some further difficulties. According to the legislation in force, such transactions are accounted for as the intra-Community acquisition of goods (ICA), where it is essential for the Polish purchaser to have a confirmation of goods receipt along with the fact that the vendor has EU VAT registration. When accounting for ICA, a Polish entrepreneur can account for the output and input tax in the same VAT return, which makes this transaction tax neutral. If the United Kingdom loses the status of a Member State, any purchase of goods from the United Kingdom shall be recognised as an import of goods. As a result, you will have to file a customs declaration and pay customs and VAT in order for the goods to be marketed. Polish taxpayers can claim a refund of VAT paid for import in the tax return for the month of payment, which in practice means in the following month, which may affect their financial liquidity. The procedure for VAT settlement referred to in Article 33a – 33b of the VAT Act may offer a certain simplification, yet it involves additional conditions that the importer must meet.
- What may also prove to be problematic is an appropriate qualification of the transaction of a return of goods to the United Kingdom, i.e. a transaction involving the purchase of a larger volume of goods first, and then the return of an unsold lot. Thus far, such a transaction was accounted for as an ICA to Poland and an ICA correction due to the return of goods. We do not know whether, in the event of a hard Brexit, it will be necessary to account for exports to the United Kingdom in respect of the returned goods, or some special legal regulations would apply here.
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Barriers not only in trade
Apart from changes in goods transactions, Polish taxpayers may face some other difficulties once the United Kingdom leaves the EU:
- Currently, the place of providing the services of intra-Community transport of goods to non-taxpayers is the place in which this transport is commenced. Once Brexit is approved, transport services to non-taxpayers performed on the territory of the United Kingdom will no longer be considered intra-Community transport, and the place of performance will have to be determined separately for the transport performed within the EU and for the transport in the United Kingdom. The same rule shall apply to the transport of goods from the United Kingdom to the territory of a Member State.
- The loss of the status of a Member State by the United Kingdom is also going to affect the procedure of claiming a VAT refund on expenses made on the territory of the United Kingdom by Polish entrepreneurs. At present, if a Polish entrepreneur does not have their seat or permanent place of business within the territory of the United Kingdom and is registered in Poland as an active VAT payer, they may get a refund of VAT paid on the territory of the United Kingdom through submitting a VAT-REF application online, conveniently through their tax office. However, this procedure is in place only for Member States; hence, after the United Kingdom’s exit from the EU, VAT refund claims will have to be submitted in line with the forms and deadlines provided for under the British legislation.
- After Brexit, it will not be possible to check the status of British entities in the VIES system, and this will make it harder to verify the credibility of prospective contractors from the United Kingdom. VIES is an EU system the United Kingdom will leave in the event of a hard Brexit. It may hinder both the
The results I have discussed here may be avoided, provided that clear-cut rules are agreed for the United Kingdom’s cooperation with the European Union after Brexit. However, as the time to find a compromise on future relations and transitional periods is running out, it is worthwhile to be prepared for every scenario, even the less optimistic one.
What is more, we do not know whether the United Kingdom will decide to introduce a substantive amendment of their internal VAT regulations; experts (mainly British tax advisors) say that such changes are not necessary and will rather not happen. Can we be sure, though? We will keep an eye on this situation for you.
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