Brexit is on the horizon. On 31st October, the UK will leave the EU in what is increasingly looking like a ‘hard deal’, where there will be no agreement between the EU and the UK. The effects are going to be felt on both sides – the EU will lose a net contributor to the bloc, while the UK suffers a variety of problems like food shortages, higher utility bills and lower per-capita income level. However, in this blog article, we are going to focus on the changes to the EU VAT refund system.
These changes are going to be significant with HRMC and other relevant tax authorities advising businesses to be prepared. What are some of the changes that businesses need to be prepared for? We discuss them in detail, below.
How will EU VAT refund change for UK businesses?
While EU businesses will certainly feel the effects of the UK’s departure, it will be UK companies that take the brunt of this change. The EU VAT refund system is a centralised, digital system that applies to all 28 member nations, which means businesses could apply for rebates from across the bloc by using a single method, making the EU VAT refund much easier. Following Brexit, UK businesses will lose this privilege. When the nation departs from the EU, the UK will be considered an outsider to the bloc, meaning that they will have to follow the regulations of non-EU countries.
With this new status, UK businesses will need to submit claims for EU VAT refunds through paper (driving up costs and administration). Furthermore, they would have to deal with all 28 members of the EU individually, forcing them to meet the conditions of each individual member nation, following the rules and regulations of each country. This will drive up the cost of VAT administration and management significantly, for some businesses, filing for a refund might not be a worthwhile endeavour because the cost will be high.
The UK government is looking to ease the transition for businesses, by postponing the accounting period for import VAT on goods brought into the country. The ruling will allow businesses to import goods to the UK and consider import VAT on their returns, as opposed to paying import VAT when the goods arrive at the border. This ruling came into effect to minimise disruption to cash flow.
HRMC has stated that post-Brexit businesses will be trading with the EU on the same terms applied to the rest of the world. To prepare businesses, the UK-based tax authority has created a ‘Get ready for Brexit’ tool – a guide to help businesses prepare for Brexit. They have also conducted webinars throughout September to educate businesses on how to prepare for Brexit.
Businesses who want to continue trading with the EU post-Brexit must complete the following procedures: Apply for an Economic Operator and Register Identification Number (EORI), simplify transaction procedures, prepare to make customs declarations, enter sum declarations, obtain licenses and pay VAT. They have also advised UK businesses to file VAT reclaims electronically before Brexit because the UK will no longer have access to the online VAT systems available to EU member nations.
What will the process be for EU businesses?
Before 2019, EU companies could file a claim for VAT refund digitally through the national VAT refund portal. The application would be passed on to HRMC, the application would be assessed, and the entire process would take four months. However, on the cusp of Brexit, EU businesses will have to change their process, given that the UK will have to be considered a non-EU country. This means VAT rules for non-EU countries will apply. In fact, the process has been in place since 30th March.
This means companies wishing to make a VAT refund claim will have to follow a paper-based application with all original receipts and invoices. This new process will increase the administrative cost and strain on VAT management operations. However, UK businesses will have to deal with the bigger administrative burden given that the UK would now have to deal with 28 different countries at once.
EU VAT refund for the future
The future is looking a little grim due to Brexit in what is looking to be a hard exit. However, in these times, it is important to remain calm because businesses will find a way to persist through this moment and recalibrate cashflow to even out shocks to the system. While there is much uncertainty about the future, it is important to keep in mind that much of it is speculation and the worst might not pass as expected. The EU is a powerful economic bloc with tremendous benefits and will survive (and even thrive?) after the UK’s departure. However, there will be a grace period where businesses will have to adapt to the new rules and procedures, which may require extensive work.
To make sure the process is manageable, they will need to use VAT refund and recovery software that can help them to recalibrate their EU VAT refund in the post-Brexit period.