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What do the post-Brexit VAT implications mean for accountants?

As Brexit negotiations continue, businesses and accountants brace themselves; will Brexit be hard – or soft – and what are the implications for VAT?

There have been calls for government transparency on Brexit negotiations and the potential impact this may have on businesses. Yet while it is still unclear whether a soft or hard Brexit lies ahead, the truth is that either will cause a level of change and upheaval for tax accountants.

But perhaps there is some clarity to finally be gained in regards to Brexit negations as the prime minister, Theresa May, delivers her speech in Florence. It is certainly due: the level of transparency thus far has caused an amount of discord. An article by the Telegraph reveals that civil servants are concerned with the amount of work being done to prepare Britain for a “no deal” scenario with Brussels.

As it stands, with Brexit negotiations currently ongoing and uncertainty surrounding both the possibility of a “hard” and “soft” Brexit, companies will have to prepare for both eventualities. Of course, as ever, “Brexit” means “Brexit” but with time quickly running out, businesses and accountants will need to consider the post Brexit VAT implications.

To find out how Brexit could impact IFRS reporting for businesses and accountants, click here.

What could a hard Brexit mean for accountants?

A hard Brexit will likely result in the UK giving up full access to the single market and customs union along with the EU. The UK would have to draw up new trade deals regarding imports and exports. Without a trade agreement with the EU, the UK would pay tariffs on goods and services exported into the EU – but the UK government has also threatened to introduce new laws to impose VAT and customs duties on all goods from the EU if no Brexit deal can be agreed. 

That said, a departure from the EU will restore the UK’s control over tax-setting as the law ruling of the Court of Justice of the European Union (CJEU) will cease to have an effect. The UK will have the ability to overhaul its tax system, possibly increasing excise duty rates beyond the current EU restrictions. In theory, VAT could go up or down following Brexit as the minimum rate of 5% is removed – and different taxable rates applied. This might mean a reduction or increase on VAT on certain supplies – but cuts are highly unlikely considering the amount of revenue VAT brings in. Different taxable rates, however, will mean that accountants and businesses will have a lot more paperwork!

Also, a hard Brexit will mean changes to the Mini One Stop Shop (MOSS). Under the current MOSS system, businesses do not need to register themselves in the countries where their customers are based in order to supply services to them. However, following Brexit, the UK would no longer be able to provide a simplified MOSS service; VAT will still need to be charged and accounted for in relation to affected supplies to customers in the remaining EU countries. This may mean registering for the non-Union Mini One Stop Shop scheme in a remaining EU country if HMRC is unable to continue operating a UK scheme. Businesses and accountants will need to file individual VAT on a country-by-country basis as a result.

Also, refunds of VAT incurred within the EU may become more difficult. At the moment, as the UK is part of the EU, businesses can make claims for VAT incurred across other member states. Post-Brexit, however, the UK will not be able to make these refund claims and will instead have to rely on the 13th Directive VAT claim scheme that allows for established businesses outside the EU to recover EU VAT. Businesses and accountants will need to re-evaluate their recovery process on a country-by-country basis.

What about a soft Brexit?

On the other hand, it’s quite possible that a “soft Brexit” could occur, adopting a Norway-style relationship with the EU. The UK could join the European Free Trade Association, along with Norway and Switzerland, where it would benefit from a special customs procedure that suspends customers and excise duties on VAT on goods that pass through the UK en route to an EU destination. A soft Brexit would restore many of the UK’s previous arrangements with the EU and allow the UK to retain access to the single market. Goods and services could be traded with the remaining EU states on a tariff-free basis and banks and financial services firms would be able to trade freely in any other state with minimal additional authorisation – meaning less headache for accountants.

Of course, at the moment, it’s all educated speculation. With Brexit talks ongoing and no real transparency regarding the work being conducted, a hard or soft Brexit are both equally possible. On that basis, it’s vital that businesses and accountants prepare themselves for both eventualities – as this will put them in the best position to respond to the VAT implications of Brexit.

To discover the potential impact of Brexit on the International Financial Reporting Standards for businesses, click here to read our eBook.