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What will the VAT cost of Brexit be?

Adrian Mooy - Tuesday, February 25, 2020
Brexit will impact on VAT more than any other UK tax. However, for now until 31 December 2020 or possibly later, the VAT rules remain unaffected. Nonetheless, while your rights to reclaim VAT and obligations to charge it stay the same, there might be changes in procedure. For example, a change in the method for reclaiming VAT incurred personally on business expenses while travelling in the EU.


EU drift


Despite no sea change in VAT rules until the end of 2020, the EU may, and probably will, make changes to its VAT rules before then. Theoretically, the UK should follow suit and reflect the changes in UK VAT regulation or practice, e.g. the zero-rating of e-books etc. to align the VAT rate with that for printed books. However, the UK government might not follow suit and it’s extremely unlikely the EU will bother arguing the point. In any event, such changes won’t affect the VAT rules for transactions between UK and EU businesses.


EU trade costs


The extent of the cost of Brexit for businesses where trade with the EU is involved will depend on how closely aligned the UK and EU rules are after the transition period ends. Unless we continue to follow the EU’s rules there’s bound to be extra admin and probably duties involved in importing and exporting goods.
Any extra costs will need to be factored in when pricing goods or services sold to the EU if and when the exit deal is done. GOV.UK has a microsite dedicated to the Brexit developments that will help you keep track of developments.


What about extra VAT costs


There will be little or no change to the VAT consequences when acquiring goods or services from businesses after we’ve left the EU. To understand this you simply need to consider the current VAT position of customers in countries outside the EU, known as “third countries”. After the transition period, unless we stick completely with EU VAT rules we will become a third country.


Currently, if you sell goods to a customer in a third country, you don’t charge VAT because it’s an export outside the EU. When the goods arrive at the other country the tax authorities there assess and charge duties and their equivalent to VAT. Your customer, subject to the rules in their country, reclaims the VAT (or equivalent). Unless there’s a special arrangement where we keep the no-VAT treatment on imports from the EU, you’ll be in a similar position as your customer outside the EU, i.e. you’ll pay VAT on goods entering the country which you’ll be able to reclaim.


Paying and reclaiming VAT.


Rather than having to pay VAT on goods you import at the time they enter the UK, the government will probably allow you to account for the VAT on your next VAT return. At that point, subject to the usual rules, you’ll be entitled to reclaim the VAT thus resulting in a cost-neutral position without any loss of cash flow.
Unless there’s a deal which retains the existing rules, VAT will be payable on imports of goods from the EU. However, you will be entitled to reclaim any VAT paid as you currently are for other purchases. The direct effect of Brexit will therefore be VAT neutral.



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