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Indirect Tax Update - VAT for businesses if there is no Brexit agreement

Indirect Tax Update - VAT for businesses

The purpose of this update is to inform businesses of the consequences in relation to VAT rules for goods and services moving between EU Member States and the United Kingdom if the United Kingdom (UK) exits the EU on 29 March 2019 without a Withdrawal Agreement (WA). The note sets out important information to be taken into account by companies trading with persons established in the UK.

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Indirect Tax Update - VAT for businesses if there is no Brexit agreement

Part A: General information

Exit with or without an agreement

Should the Withdrawal Agreement for the Brexit is ratified before 30 March 2019, most of the legal effects of the Brexit will enter into force on 1 January 2021, i.e. after a transitional period of 21 months, with the relevant terms set out in the draft WA. If the two sides ratify the agreement, they will continue in the next 21 months to treat shipments of goods to and from the United Kingdom as intra-Community acquisitions and dispatches, and VIES statements will continue to be submitted.

Otherwise, that is, without an agreement, as of 30 March 2019, the United Kingdom will be treated as a third country and therefore shipments of goods to and from the United Kingdom will be treated as imports and exports respectively.

Significant milestones

- Until 29 March 2019

The current VAT rules continue to apply

- After 29 March 2019, if there is no agreement

If the United Kingdom leaves the EU on 29 March 2019 without an agreement, then there will be specific changes to the VAT rules and procedures applicable to trade transactions between EU Member States and the United Kingdom.

In such a case, companies should prepare for the import and export of goods to and from the United Kingdom, the provision of services to and from the UK, and their interaction with EU VAT systems such as (Mini One Stop Shop (MOSS) and the 'Value Added Tax Information Exchange System (VIES)'.

The current rules on imports from third countries will also apply to imports from the United Kingdom. It is noted that the UK, among the measures it is preparing to deal with a non-agreed Brexit, is to exempt companies from paying import VAT by applying the reverse charge procedure.

On the European Union side, no such announcements have yet been issued with a statement of intent and instructions to companies, so our note is issued with all reservations based on the available information on the subject. Some Member States, including Cyprus, have already issued notices regarding VAT refund claims from other Member States since the UK will no longer participate in the EU VAT refund scheme. These announcements encourage businesses to submit electronically, claims for VAT refunds before 29 March 2019.

EU VAT refund system

It is expected that, if the UK exits the EU without an agreement, businesses based in the UK may face difficulties because they will no longer have access to the EU VAT refund system. They will of course still have the ability of claiming VAT refunds from EU Member States, but will have to use the procedures applicable to non-MS that have concluded reciprocity agreements on VAT refunds.

After 29 March 2019, EU businesses will have to submit VAT refund requests from the United Kingdom by applying a new procedure to be announced by UK or the current procedure for third country businesses. It is noted that the deadlines for submitting requests are different depending on whether the request is submitted to a MS or a third country with which there is reciprocity agreement. Requests for VAT refunds paid in the UK by companies established in third countries are submitted by 31 December and cover a period of 12 months from 1 July to 30 June.

Businesses established in MS may, and are therefore urged, before 29 March 2019 to submit electronically VAT refund claims to UK VAT Authorities for the calendar year 2018. The deadline would normally expire by 30 September 2019 if the UK exits EU under an agreement.

On 22 February 2019 an announcement was issued by the Department of Taxation of the Republic of Cyprus entitled "Returns to Traders in Other Member States under Directive 2008/9", urging companies to submit their request by 10 March 2019 in order to enable the Department of Taxation to forward it before 29 March 2019 to the United Kingdom VAT authorities.

EU businesses exporting goods to the UK

If the United Kingdom leaves the EU without an agreement, EU-registered companies will continue to be able to exempt from VAT sales to UK companies without having to fill in the VIES and INTRASTAT for dispatches.

They should keep evidence to show that the goods have been exported. Most businesses already maintain this information as part of the current procedures and the required data will be similar to those currently required for exports to third countries.

EU businesses importing goods from the United Kingdom

EU Member States will treat goods entering the EU from the United Kingdom in the same way as goods imported from third countries with equivalent import VAT and customs duties owed upon arrival of the goods in the EU. Some Member States of the EU may have different VAT rules for imports from third countries.

VAT on vehicles from the United Kingdom

If the United Kingdom exits the EU without an agreement, it is expected that the Cypriot businesses trading in used passenger cars will be significantly affected. Import VAT will be payable on second-hand vehicles from the United Kingdom and no longer eligible for the profit margin scheme for non-VAT-qualifying passenger cars.

Place of supply of services

If the United Kingdom leaves the EU without an agreement, the main rules on the place of supply of services will remain the same.

European companies providing electronic services to non-business customers in the United Kingdom will probably be affected (perhaps positively). The "place of supply" will continue to be the place of residence of the customer. If the United Kingdom does not apply a special regime, analogous to the "non-EU" regime applied by the EU to third-country firms, the provision of e-services to UK consumers will be exempt from VAT.

European businesses providing insurance and financial services to UK companies will also be positively affected in relation to the ability of these companies to claim input tax in relation to costs related to the provision of these services.

Tour Operators Margin Scheme (TOMS)

If the United Kingdom leaves the EU without an agreement, the profit margin from designated travel services or packages of designated travel services taking place in the UK will be subject to zero (0%) instead of the positive VAT rate (19%).

Mini One Stop Shop (MOSS)

If the United Kingdom left the EU without an agreement, non-EU companies that had selected the United Kingdom as their country of registration to provide online services to consumers in the EU will no longer be able to use the Mini One Stop Shop portal (MOSS) in the United Kingdom. They should enroll in the non-EU MOSS VAT system in another EU Member State.

This note is for general information only and may be subject to changes. You should consider whether you need separate professional advice before proceeding with final arrangements.

You can obtain information on developments on the website of the European Commission.

Part B: Customs guide for businesses based in Cyprus

In the absence of a Withdrawal Agreement, which would put in place a transition period until the end of 2020 (with the possibility of an extension foreseen in the Withdrawal Agreement), the UK will be treated as a non-EU country for customs purposes as of 30 March 2019.

If you have not taken any steps so far, it is now necessary to start your preparation.

Brexit will affect your company if it

- sells goods or supplies services to the UK, or

- buys goods or receives services from the UK, or

- moves goods through the UK.

What does this mean?

Without a transitional period (as tabled in the Withdrawal Agreement) or a definitive arrangement, trade relations with the UK will be governed by general WTO rules, without application of preferences, as of 30 March 2019.

This means in particular that:

- Customs formalities will apply, declarations will have to be lodged and customs authorities may require guarantees for potential or existing customs debts.

- Customs duties will apply to goods entering the EU from the United Kingdom, without preferences.

- Prohibitions or restrictions may also apply to some goods entering the EU from the United Kingdom, which means that import or export licenses might be required.

- Import and export licenses issued by the United Kingdom will no longer be valid in the EU.

- Authorizations for customs simplifications or procedures, such as customs warehousing, issued by the United Kingdom will no longer be valid in the EU (EU27).

- Authorized Economic Operator (AEO) authorizations issued by the United Kingdom will no longer be valid in the EU (EU27).

- Member States will charge VAT at importation of goods entering the EU from the United Kingdom. Exports to the United Kingdom will be exempt from VAT.

- Rules for the declaration and payment of VAT (for supplies of services such as electronic services), and for cross-border VAT refunds will change.

- Movements of goods to the United Kingdom will require an export declaration. Movement of excise goods to the UK may also require an electronic administrative document (SAD).

- Movements of excise goods from the United Kingdom to the EU will have to be released from customs formalities before a movement under Excise Movement and Control System (EMCS) can begin.

What should you do?

In order to avoid interruption of work, all affected businesses need to prepare and make the necessary decisions by completing all the necessary procedural actions before 29 March 2019.

The following checklist lists the practical steps you need to take to prepare yourself:

1. ASSESS whether your business trades with the UK or moves goods through the UK.

If it does:

2. REGISTER your business with the national customs authority, if you have not done so for trading with non-EU countries. 

3. ASSESS whether your business is ready to continue trading with or via the UK by having the necessary:

(a) Human capacity (staff trained in customs matters);

(b) Technical capacity (IT systems and others); and

(c) ustoms authorizations, such as for special procedures (storage, processing or for goods under the “specific use” rule).

4. ENQUIRE with your national customs authority about the existing customs simplifications and facilitations that are available for your business, such as:

Simplifications for transit procedures.

(a) Comprehensive guarantees, with reduced amounts or waivers;

(b) Simplifications for placing goods under a customs procedure;

5. CONSIDER applying for an Authorised Economic Operator (AEO) status from your national customs authority.

6. If you are registered for the VAT Mini-One-Stop-Shop in the UK, REGISTER in an another Member State.

7. If you have paid VAT in the UK in 2018, SUBMIT your VAT refund claims sufficiently in advance of 29 March 2019 for them to be processed before that date.

8. TALK to your business partners (suppliers, intermediaries, carriers etc.) as Brexit might also impact your supply chain.

How can KPMG assist?

Should you like to further discuss the content and potential impact of the Circular to your business, please contact one of our trusted advisors from the Indirect Tax Department at KPMG Cyprus.

KPMG’s Indirect Tax team provides advice and assistance at the Cyprus and international level. We structure our effort to dovetail with your business issues and strategy. Our focus is on supplying value adding and pragmatic advice rather than just a list of recommendations.

Our tax professionals are able to review your company’s current tax position and provide relevant advice and planning on a range of indirect taxes, including VAT, customs duties and excise taxes (such as tax audits, reorganizations and acquisitions, etc.). Furthermore, we can help your company with its administrative obligations and contacts with administrative bodies.

© 2020 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.

Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm.

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