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Brexit vs VAT

Brexit vs VAT

Brexit – what’s next?

For a long time the issue of Great Britain leaving European Union remains one of the hot topics on the international arena. The ‘divorce’ is scheduled for the end of March 2019. However, many question pertaining to this move remain unanswered. There are currently two scenarios for UK’s leaving the EU. The first is to leave the Union structures with the signed agreement – ‘soft Brexit’, conversely, without an agreement, called ‘hard Brexit’.

An agreement containing nearly 600 pages has been drafted  for the purpose of regulating issues such as future legal and commercial cooperation, finances, personal data and to define the shape of future relations with the EU. However, despite the rapidly approaching date of ‘divorce’ with the EU, a lot of uncertainties bring sleepless nights, particularly to the entrepreneurs.  This is especially relevant in the context of how future trade will look like and what formalities will have to be satisfied to perform seamless transactions under EU-GB scheme.

Fiscal representative – required?

The crucial effect of Brexit for the British entities registered, or those planning to register, for VAT purposes in some European Union countries, e.g. Poland, Hungary or Romania, , will come in a form of requirement to establish a fiscal representative. At the present, all that is needed is to register for VAT purposes at the Tax Office.

Upon UK leaving the EU  companies from this country will become ‘foreign entities not based in the European Union and subject to registration as an active VAT payer’. Thus, they will be required to establish an obligatory fiscal representation.

If no transitional provisions are to be introduced, the establishment of a tax representative will have to take place suddenly and affect the already existing registrations. Otherwise, the companies will not be able to perform their fiscal obligations on its own and in its name e.g: submitting monthly declarations and the summary information.

The selection of right representative is of paramount importance; the representative (with all his assets), is held liable for the prepared settlements thus, guaranteeing their accuracy, correctness and reliability. Failing to establish a required fiscal representation may result in serious consequences such as imposition of penalties or even de-registration, which ultimately leads to the need for re-registration and thus, a tedious administrative process.

ICS / ICA or export / import?

So far, VAT transactions carried out by the taxpayers, involving the transfer of goods between Great Britain and other European countries, were treated as intra-Community acquisitions / delivery of goods – ICA / ICS. However, for a transaction to be considered as Intra-Community, it must contain an element of dispatch or transport of the goods to the place of destination in a Member State different from one in which dispatch or transport of the goods began.” Therefore, it can be concluded that in case when United Kingdom fails to make an agreement regulating trade relations with the European Union, such transactions will gain import / export status.

The change of the delivery status for the deliveries from Great Britain will involve the necessity of customs clearance and, as a consequence, obtaining a certificate of origin of the goods, meeting other sanitary standards, which will result in additional costs related to the flow of goods to and from Great Britain.

Simplified triangulation transactions – not so simple anymore?

Based on Article. 141 Council Directive 2006/112/EC, it is possible to apply a simplified scheme of Intra-Community transactions. However, to be able to utilise this type of settlement, it is necessary to meet all required conditions with one of them being registration for VAT purposes in a member state of the European Union.

Assuming a hypothetical scheme in which:

  • each entity has only one registration for VAT purposes,
  • the place of registration for VAT purposes is the same as the address of the registered office
  • one of the participants in the transaction is an entity from GB

all conditions are met to classify the transaction as an intra-Community trilateral transaction.

Currently, despite being involved in a simplified tripartite transaction of three entities, the only taxpayer obliged to charge VAT is the third party (at the same time the final purchaser of the goods). It is also not necessary to register for VAT purposes for a local transaction.

However, when the United Kingdom leaves the European Community without signing specific agreements, it will no longer be possible to fulfil  condition that requires all VAT registrations to come from European Union countries. Thus, this transaction can no longer be considered as an intra-Community trilateral transaction. Entities will also need to register for VAT for the purposes of local transactions.

Own movements of goods – what’s new?

The changes await not only those entrepreneurs who trade with clients from the United Kingdom, but also those who have branches in this country. Transactions which up until now were treated as intra-Community supplies or intra-Community acquisitions of goods will no longer have such status and may, at best, meet the definitions of exports and imports respectively. With regard to the transfers of own goods, question whether such transaction will be the subject of VAT should be analysed for each EU Member State. For example currently, according to the Polish law, the transfer of own goods from Great Britain to Poland is the subject of the VAT as intra-Community acquisition of goods, and non-transactional export of own goods from Poland to the United Kingdom as intra-Community supply of goods. However after Brexit, movements of the own goods from Poland to Great Britain will not be the subject of a reporting in the Polish VAT declaration.

GB EORI number – valid or not valid? That is the question…

The EORI number is a number assigned to the entrepreneurs importing or exporting goods outside the European Union. It is mandatory to have an EORI number if performing business activities based on the use of customs work regulations. Currently, trade with the United Kingdom is based on Intra-Community Supplies / Acquisitions. After Brexit, the transactions will be classified as import and export of goods and as a consequence, companies trading with the UK will be required to have an EORI number. Therefore, it will be necessary to obtain such number in one of the EU Member States given Great Britain will no longer be one of them.

Yet, there comes a question  regarding the EORI numbers assigned by the UK up to Brexit. According to the current system, the EORI number can be assigned by a Member of the European Union. What will happen with the numbers already assigned by Great Britain? Will they expire and entrepreneurs would have to apply for  new number in another Member State? Will there be a transitional period leaving temporary ‘open door’ to use GB EORI number? Taking into account the potential future costs associated with the possible conversion of all UK EORI numbers, to the numbers of Member States, it seems reasonable to keep the EORI numbers already issued by the UK up to now. However, despite “divorce” deadline looming closer , there are no reports regarding such solutions.

Life after ‘divorce’

The least favourable scenario for entrepreneurs would be leaving the European Union without signing the arrangements with the Union. From both European and British entrepreneurs’ perspective, this option would be financially most costly incurring expenses relating to establishing a tax representative, applying for an EORI number and resigning from a simplified variant of settlement of the triangulation transactions. The more favourable solution will be the implementation of the agreement, which provides for a transitional period until the end of 2020 (with the possible  extension). In this variant, the ‘stand still’ formula envisages option to preserve the current state until the transitional period expires.

On 15th Jan 2019, the agreement regarding the UK leaving the European Union was rejected in the voting of the British House of Commons. Further attempts were made on 29th Jan, 14th Feb and 27th Feb, unfortunately unsuccessfully. Nevertheless, the efforts to reach compromise are still ongoing and next Westminster discussions are planned for today, 12th Mar.

In light of the prolonged process pertaining to the implementation of the agreement, the speculations on alternative Brexit date are rampant. In this situation, all concerned have to remain patient.

Joanna Konopka

Junior VAT Consultant

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