By Ayuk Ntuiabane, Director – VAT, Equiom Tax Services
As Brexit negotiations continue, the future of the UK’s trading status with the EU remains clouded in mystery. One development that does seem certain, notwithstanding any transitional deal that may be put in place temporarily after the UK officially exits the EU, is that the UK will leave the Customs Union, thus creating a new trade boundary for goods and services for UK businesses wishing to trade with the 27 remaining member states. The impact on cross-border trade that this may have could be considerable.
A significant driver of cross-border trade to and from the UK is the emergence and increasing prominence of eBusiness. The UK Office of National Statistics estimates that in 2015 the EU was the destination for 43% of exports of ‘digital services’ and the source of 56% of imports. Tax laws have long been playing catch-up with the development of the electronic economy driven by internet commerce. As a result, the EU has adopted measures for certain eCommerce and distance selling activities aimed at ensuring they are consistently treated for VAT purposes across the EU.
As a member of the EU, the UK has access to various reliefs available to eBusinesses; that is, businesses supplying goods and services electronically. Access to these reliefs will potentially cease when the Article 50 proceedings are finalised and Brexit is officially enacted, which is due to take place in March 2019.
We will consider below some ways in which UK distance sales and eBusiness could be affected once March 2019 arrives.
Going the distance
As part of the UK’s membership of the EU, UK-based businesses which sell goods to EU consumers are exempt from having to register for VAT in each country until their sales reach the annual ‘distance selling threshold’ in each EU Member State. Once they exceed this threshold, UK businesses must VAT register in each country, submit VAT returns and pay local VAT. The distance selling thresholds vary by country, but many have the same threshold of €35,000 (the UK’s threshold for businesses from other EU states trading here, by way of comparison, is £70,000). These thresholds are only available when selling from other EU countries.
Once Brexit comes into effect, UK small businesses may lose access to these thresholds, and may have to VAT register in every country where they are selling. The European Commission estimated the cost of this compliance burden at €8,000pa per EU Member State. Where a company trades with all 27 remaining EU member states, this cost of compliance could, therefore, amount to €216,000pa.
There are many UK small businesses in receipt of revenues from EU eCommerce, which presently come without the need for numerous foreign VAT returns and language barriers. Those businesses which are affected will have to weigh up the compliance costs against the potential loss of trade. There is an alternative to this new burden, by ceasing to sell to EU customers in order to avoid the VAT requirements, but this means an end to EU sales – likely not an attractive option for most businesses.
Electronically supplied services
Electronically supplied or ‘digital’ services are broad and wide-ranging. They include the so-called ‘digital-producing’ types relating to digital goods and services, digital skills linked to persons and the workforce, data flows which are practically inseparable from trade flows, and even wholesale fixed and mobile voice and data services associated with roaming charges.
The EU VAT place of supply rules for digital services from businesses to consumers (B2C) were changed with effect from 1 January 2015. For cross-border sales of digital services there is no registration threshold and VAT is charged at the rate due in the consumer’s country.
Since the rules changed, the place of supply for VAT in respect of such services – i.e. where the VAT is due – is where the consumer is established. This is the same as for business-to-business (B2B) services, except that where the recipient is a VAT-registered business, they account for the VAT themselves under the reverse charge mechanism, which does not apply to non-VAT registered consumers.
The result of this is that a UK business supplying digital services to non-VAT registered consumers in other EU member countries must pay VAT in each EU country to which it supplies those services, in accordance with that country’s VAT rules. However, the potential administrative burden of this is lessened by the availability of the VAT Mini One Stop Shop (MOSS) system, which allows UK businesses to just submit one MOSS return covering all of its sales to other EU Member States; it is then not necessary to declare VAT due separately in each EU Member State.
Once the UK leaves the EU, however, it will no longer be able to offer access to the MOSS system. Businesses will no longer be able to use the UK as their prime registration country for MOSS and may need to register in one of the remaining 27 member states in order to gain access to it, or, alternatively, VAT register in each member state to which they make supplies – precisely what MOSS is designed to prevent the need for.
Particular care should be exercised by eGaming companies operating within the EU, whose supplies may be exempt under UK rules but not in other EU countries. For example, certain gaming supplies are VATable in Germany and Ireland. In these cases there is a requirement to use MOSS (while it remains available) or VAT register and charge VAT in the other country.
For digital services supplied to UK consumers from outside the UK – those that could currently be dealt with by the seller’s MOSS returns in another EU country – the UK will be able to introduce a new registration regime, if the government so desires. It has been proposed that such a regime could deal not only with these digital services but also inbound distance sales from outside the UK, thus simplifying the VAT treatment of distance sales. This could potentially encourage trade with UK businesses from other EU countries once it has left the EU and therefore may be seen as an attractive proposition.
Customs and costs considerations
Post-Brexit, UK businesses supplying goods to consumers in other EU countries are unlikely to be required to abide by the EU distance selling regulations but suppliers may want to consider setting up an EU VAT registration in order to streamline VAT accounting and remain competitive with EU suppliers.
Arguably, the outcome of the Brexit vote was largely driven by political rhetoric and the public’s perception of EU immigration into the UK. To be able to impose restrictions over immigration from EU countries, the UK will almost certainly have to leave the EU’s Single Market. This means an end to the right of eCommerce merchants to sell goods across EU borders without tariff charges or customs checks, so many goods could face customs levies of around 3%. In addition, there could be a not insignificant quantity of new import documentation requirements, which would negatively impact small businesses in particular.
There is an even bigger question as to Brexit’s impact on digital services. Unlike trade in goods, trade in services is rarely directly affected by tariffs, but can be significantly affected by non-tariff barriers. Non-tariff barriers include restrictions on data flows, on the ability of a service provider to establish itself or operate in a different country, and requirements for service providers to possess certain qualifications before being allowed to provide a service. Brexit is coming in the wake of the EU launching its ‘Digital Single Market Strategy’ and ‘Connectivity Package’, initiatives to create a single market in digital services by harmonising, among other things, copyright, consumer protection and the relevant VAT laws. The concern is that post-Brexit this strategy could be used to introduce non-tariff barriers to UK businesses providing services in the EU.
The more things change, the more they stay the same?
Much depends on the progress of the Brexit negotiations which, based on recent media reports, are not considered to be making much headway as yet. The UK is seeking a transitional arrangement to prevent a ‘cliff edge’ for businesses once Brexit is actually implemented but the EU is taking a predictably hard line, making it clear that the UK cannot continue to benefit from the perks of EU membership once it has left the club.
What may emerge is some form of specifically tailored trade and customs deal; a system akin to those in place with (non-EU countries) Norway or Switzerland has been suggested. This, however, is unlikely to meet with the UK’s approval, since both countries have to accept free movement of people from the EU, which is one of the UK Government’s main sticking points, as immigration was such a hot topic in the referendum.
Given the stakes involved for both sides, it seems unthinkable that the apparent impasse in negotiations will not be overcome in due course. Neither party will want to sacrifice trade with the other, despite the EU’s advantage in terms of size and bargaining power. The deal that the UK would most like to strike is one that sees as little change as possible for UK businesses where cross-border trade is concerned. If they get their wish, it is possible that the rules for UK businesses may be similar to those that already exist, outlined above. However, whether EU negotiators would be prepared to accept a variation on the current trade system remains to be seen. Stay tuned.