The European Commission (EC) “notice to stakeholder” details what will happen after the Brexit transition period which terminates on 31 December 2020. The Notice also outlines how VAT on UK goods and services will be treated before and after the transition period. This is worth noting for all finance departments who may have to start restructuring their VAT compliance procedures and refund processes.
The Notice titled Withdrawal Of The United Kingdom And Eu Rules In The Field Of Value Added Tax (Vat) For Goods confirms that all EU Law in its entirety will still apply to the UK applies to and in the UK until 31 December 2020.
The EU and UK Relationship after the Brexit Transition Period
After the Brexit transition period, all EU laws cease to apply to the UK and the UK gains the status of a third country in relation to the member states of the EU. However, it is important to note that the possibility of an agreement to regulate the relationship between the EU and the UK exists and if this agreement materialises, it will regulate the terms of market access between the two parties.
What are the Implications of Brexit on Foreign VAT after the Transition Period?
Cross-border supplies of Goods
At the end of the transition period, the EU rules for cross-border supplies and movements between Member States will no longer apply in the relations between the Member States and the United Kingdom (e.g. no intra-EU supplies and acquisitions of goods). Therefore supplies and movements of goods between the EU and the United Kingdom will be subject to the VAT rules on imports and exports. This will have major impacts on import VAT and excise duties. For a more detailed breakdown of the changes to import VAT, read this article.
After the transition period, all the 13th directive rules apply to refunds by Member States to taxable persons established in the United Kingdom. The 13th Directive is the reclaim mechanism designated to businesses based outside of the European Union. The same reciprocity rules will be applied by member states to the UK. Simply, if the EU member state can claim VAT from the UK, then the UK can claim VAT from the EU member state.
What if VAT was Paid Before the end of the Transition Period?
For VAT paid before 31 December 2020 and on transactions between UK and the EU, the applicable VAT refund portals will remain functional till the 31 March 2021. However, although the EU refund portals will be functional till 31 March 2020, this is only to permit the submission of VAT paid before the end of the transition period. To illustrate, if VAT is incurred on the 3 January 2021, then the VAT refund claim must be submitted via the 13th Directive if the MSE is UK and MSR is an EU country.
There may be more changes to come with regards to the treatment of VAT after the Brexit transition period. We are yet to see if the COVID-19 pandemic may create delays of the implementation of the new Brexit VAT regulations. VAT IT continues to monitor any VAT legislation changes affected by Brexit.