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No-Deal Brexit – VAT consequences

There has been a lot of press and media coverage about the resulting horrors of a no-deal or Hard Brexit, but what does this mean for UK businesses providing services in the EU and their liability to pay VAT?

VAT or value added tax, is an indirect tax usually applied to the supply of goods and services. VAT on services is chargeable according to the place of supply rules. These rules basically determine whether the VAT will be payable in the UK or in the EU country to which the services are being supplied. Generally, if the customer is a business customer the place of supply will be the place where the customer belongs, and if the customer is a non-business customer the place of supply will be the place where the provider belongs.

Therefore, in the situation where the customer belongs in the EU and is not VAT registered and they purchase services from a UK provider, the provider will ordinarily charge their fee plus an additional 20% VAT because VAT is payable by the provider to HMRC in the UK.

EU Member States (including the UK) have VAT regimes in place. Countries outside the EU are outside of the VAT system and therefore VAT is not charged on services provided to customers in these countries.

If the UK exits the EU without a deal, according to Government guidance, the rules on what VAT is payable and where will largely remain the same. This is because the place of supply rules exist in UK law and the UK will still have a VAT system after Brexit. Therefore, UK businesses providing services to non-VAT registered customers in the EU will still need to account for VAT and this will still be payable to HMRC.

One potential area of change is for UK businesses supplying insurance and financial services to the EU as a no-deal Brexit may mean that input VAT deduction rules are changed. Furthermore, UK businesses offering digital services in the EU currently pay VAT via the MOSS system which allows businesses to pay VAT to HMRC instead of in another EU member state. To benefit from this after Brexit, UK digital services suppliers will need to register under the non-EU scheme. However, as they can only do this after 29 March 2019, they will need to account for the gap between this date and when their non-EU scheme is registered.

It is possible that the UK Government will change the rules on VAT as they will no longer have to follow EU law on this. However, VAT is a large and important source of public income and it is unlikely the Government will make any move which eradicates this.

Top tip: Plan ahead and be aware of how Brexit may affect your business.

For advice on Tax, please contact Graeme Perry, Head of International and Cross Border Tax.