The UK VAT Implications Of Brexit For Services Businesses

Much of the commentary on the VAT and Customs Duty implications of Brexit relates to the movement of goods between the UK and European Union (EU) and vice versa. It is worth noting that there are also potential VAT changes to consider for businesses that provide services rather than goods. 

Where Are We Now?

Following the official departure of the UK from the EU at the start of the year, the UK is now in a period of transition until 31 December 2020, with negotiations taking place to decide what form the UK’s relationship with the EU will take and, in particular, the trading arrangements. Much of the trade negotiations’ emphasis is on goods and the tariffs applicable to their movements between the UK and the EU. While there could still be some changes, the VAT rules applicable to sales of services from 1 January 2021 are likely to be more stable, allowing businesses to start making their preparations now.  

Expected VAT Changes For Services Businesses After 1 January 2021

Generally, many of the UK’s VAT rules applicable to businesses providing services will remain unchanged by Brexit. For example, no widespread changes to the place of supply or rates of VAT have been announced. However, there are six areas where change is expected:

• Billing International Customers: Generally, businesses providing services to customers outside of the UK should find getting the correct VAT treatment more straightforward, as there is less likely to be a need to distinguish between EU and non-EU customers. While there will be exceptions (such as services related to land, digital services, admission to events, and telecommunications, to name a few), the general rule is that services billed to customers outside of the UK will be outside the scope of UK VAT. 

• Digital Services: For UK sellers of digital services to EU consumers, the UK will no longer be a member of the EU Mini One-Stop-Shop, meaning that there may be a change to the business’ EU VAT compliance requirements. Any non-EU company which used a UK MOSS registration will have to reregister for MOSS in the EU and separately in the UK under a regular VAT return. The same is also true for EU businesses who will need to UK VAT register to account for UK VAT on digital services sales to UK-based consumers. 

• Use And Enjoyment Rules: UK businesses supplying services to the EU will be treated as a third country, and Use and Enjoyment rules in each Member State may require the UK supplier to VAT register and account for local VAT in the EU. This will need to be checked on a country by country basis as each EU Member State can set its own rules as to what services are subject to Use and Enjoyment. Similarly, EU businesses providing services such as telecommunications services, broadcasting services, electronically supplied services, hired goods, and hired means of transport to UK customers may now have an obligation to register for VAT in the UK. 

• Reclaiming VAT On Financial Services Supplies: UK businesses providing certain financial services could benefit from increased VAT recovery under an extension of the ‘specified supplies’ rules. At the moment, these rules only apply when a UK business is providing certain services to non-EU customers; from next year, the ‘specified supplies’ rules are being extended to include sales to non-UK customers. 

• Recovery Of EU VAT: There will be changes to how UK businesses reclaim EU VAT in countries where they are not required to be VAT registered. At the moment, such claims are made to HMRC in the UK, whereas after the end of the transitional period, the claims will need to be made direct to the local overseas tax authority. There may be changes to the time limits of when claims can be made and different procedural requirements. 

• Appointment Of A Fiscal Representative: Any UK businesses registered for VAT in an EU Member State in which they are not resident may have to appoint a fiscal representative. This will increase compliance costs as the fiscal representative will charge for its services and require a bank guarantee to be provided as the representative is jointly liable for any VAT debts. To date, there is inconsistency in the EU Member States whether this is required; therefore, the position in each country should be reviewed. 

To help make the smartest decisions for your business at each step of the above and beyond, it is worth seeking specialist advice to look at your business operations more generally. Specialist advisors are skilled in spotting and addressing issues that you may have overlooked or not had the chance to think about. 

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