The government’s defeat in the ‘Meaningful Vote’ for parliamentary approval on the proposed Brexit deal could be seen as a step in the direction of a no deal Brexit. It also increases the urgency for businesses to be reviewing the potential impact on their organisation and, where possible, taking contingency steps.
Much of the commentary about the possible impact on indirect taxes of a no deal Brexit focuses on:
These concerns are not relevant to professional services who, whilst trading cross-border, do not sell tangible products.
For professional service firms, the primary VAT risk is that Brexit results in changes to the VAT treatment of cross-border sales. The good news is that we do not expect any immediate changes to the VAT place of supply rules for cross-border supplies of services. There are, however, several areas where changes may occur, which firms should monitor and assess their possible impact.
Most countries (certainly those in the EU and some non-EU) operate exported services rules that mean they do not charge local VAT when providing services to overseas business customers. The local country VAT rules consider the ‘place of supply’ (the country in which VAT is due) and, whilst there are some exceptions, such as for land transactions and admission to events, most services provided to an overseas business customer are regarded as being received overseas and not subject to local VAT. We would not expect the UK leaving the EU to result in a change when UK firms purchase professional services from EU based suppliers.
The same principles apply for services provided outbound from the UK. For example, if post Brexit a UK firm was to charge an EU business for professional services then it would raise an invoice without UK VAT on the basis that the service has been exported from the UK. This is in the same way it would currently do for a US business customer. This is because of the place of supply rules and we expect the same rules to apply after a no deal Brexit.
One area that will need to be monitored is the UK and EU’s VAT use and enjoyment rules. These apply to certain services supplied by a local business to a non-EU customer. The UK becoming non-EU could mean that an EU country requires their country’s VAT to be applied on charges to a UK customer on the basis the service was “used and enjoyed” in that local EU country. The EU Member States have a certain amount of discretion as to which services are subject to a ‘use and enjoyment’ override so this is an area that would need to be monitored as it could change.
The same is true for UK suppliers of services to EU customers. At the moment, ‘use and enjoyment’ would not apply but post Brexit UK suppliers may have to charge with UK VAT. The UK currently only applies a ‘use and enjoyment’ override to telecommunication and broadcasting services, electronically supplied services and the hire of goods.
In more general terms HMRC’s no deal guidance confirms that there would not be changes to the UK’s place of supply rules for services, although it should be noted that many of the rules rely on simplifications which may not be available after Brexit.
Taking one example; the Mini One Stop Shop (MOSS) which enables UK businesses selling digital services to consumers in the EU to account for VAT due in other member states through the VAT return system of the UK. As with goods, a no deal scenario would most likely require multiple VAT registrations across the EU or have more strict conditions applied to the operation of any simplification. It is likely that this would be the case even with a deal in place as the UK is not likely to be treated as if it were within the EU for simplifications such as MOSS.
The no deal guidance also makes reference to the EU VAT refund system which the UK would no longer be part of post Brexit. Therefore UK businesses would be relying on the refund system that each EU country has with non-EU countries, which may have more stringent conditions, and in some cases, countries simply do not refund such claims. Once again this is likely to be the case were the UK to leave with a deal as the refund system is EU specific.
Finally, for professional firms that are VAT registered but not established in an EU Member State, there is also the possibility they may need to appoint a fiscal representative in the local country, potentially increasing the cost of local VAT compliance. It is common across the EU for fiscal representation to be required for non-EU businesses that are locally VAT registered.
We are working with a number of firms to help them to understand the impact of Brexit on the VAT position of their organisation. This commonly takes the form of us meeting with relevant stakeholders within the business to review the various types of purchase and sales transactions to understand what may change on 30 March 2019 should there be a ‘no deal’ Brexit.
We have also recently issued details of practical, “no remorse” actions that businesses can be taking now to prepare for Brexit. To discuss how Crowe could help you, please contact Robert Marchant or your usual Crowe contact.