What will Brexit mean for EU VAT refunds?

Three years on from the his­toric vote to leave the Euro­pean Union, British busi­ness­es con­tin­ue to oper­ate in a state of ambi­gu­i­ty as the debate around whether the UK will exit with a deal rages on.

You’re going to tend to plan for the worst-case sce­nario and the worst-case sce­nario is no deal

This has sig­nif­i­cant impli­ca­tions for busi­ness­es car­ry­ing out cross-bor­der trans­ac­tions, which must pre­pare for a revised EU VAT refund regime and new cor­po­rate tax require­ments amid the ongo­ing uncer­tain­ty.

What will VAT look like post-Brexit?

Cur­rent­ly, the UK enjoys access to a sin­gle EU VAT refund sys­tem, which oper­ates across all 28 mem­ber states, allow­ing com­pa­nies to file an elec­tron­ic claim.

How­ev­er, the cur­rent sys­tem is unlike­ly to be avail­able post-Brex­it, espe­cial­ly if the UK leaves with no deal. Instead, busi­ness­es will have to deal with EU coun­tries indi­vid­u­al­ly and revert to a paper-based process for each claim.

While the cur­rent EU VAT refund sys­tem has tak­en much of the drudgery out of the process with stan­dard­ised dead­lines, forms and claim peri­ods, going for­ward busi­ness­es will need to famil­iarise them­selves with a host of dif­fer­ent require­ments for each of the mem­ber states.

Accord­ing to Nigel Roberts, VAT direc­tor at John­ston Carmichael, tax depart­ments should be prepar­ing for the changes now to ease poten­tial admin­is­tra­tive and cash-flow bur­dens.

“The cur­rent EU VAT refund sys­tem is rel­a­tive­ly straight­for­ward and makes cross-bor­der claims with­in the EU pret­ty pain­less. Post-Brex­it claims, par­tic­u­lar­ly if the UK leaves with no deal, could be much more dif­fi­cult to make,” he explains.

“The whole process could be more cum­ber­some and expen­sive because sep­a­rate claims will need to be made, and repay­ments may be slow­er out­side the EU frame­work.”

What are the biggest difficulties facing business?

Accord­ing to the Char­tered Insti­tute of Tax­a­tion, busi­ness­es may be required to show a stricter lev­el of evi­dence to sup­port their VAT return and time lim­its for pay­ments may vary con­sid­er­ably between dif­fer­ent EU coun­tries. Fur­ther­more, claims will need to be sub­mit­ted in the local lan­guage and some coun­tries will require appli­cants to appoint a fis­cal rep­re­sen­ta­tive.

The insti­tute warns that this could result in delays in busi­ness­es get­ting their tax back.

Jayne Simp­son, the institute’s VAT and indi­rect tax­es tech­ni­cal offi­cer, notes: “The first year will undoubt­ed­ly be the hard­est for UK busi­ness­es as they seek to make the tran­si­tion. They may incur addi­tion­al costs to assist with lan­guage or choose to pay out­side recov­ery spe­cial­ists or over­seas agents to aid them through the new paper-based process.”

There is also a big ques­tion mark over reci­procity. Giv­en the UK’s gen­er­ous inter­na­tion­al refund posi­tion, it is assumed EU mem­ber states will repay UK busi­ness­es, but nego­ti­at­ing agree­ments could take time.

In the event that the UK exits the EU at the end of Octo­ber with no deal, com­pa­nies will forego the tran­si­tion­al peri­od and will be expect­ed to sub­mit their final claims via the online EU VAT refund sys­tem by Octo­ber 30, there­after switch­ing straight to the inter­na­tion­al process.

Ms Simp­son says: “The larg­er com­pa­nies are mak­ing prepa­ra­tions, but we are see­ing a big chunk of busi­ness­es tak­ing a wait-and-see approach. We would advise all busi­ness­es to review their tax posi­tion now.”

Is Brexit “a step backwards” for overseas VAT reclaim?

In light of the more strin­gent and time-con­sum­ing require­ments, it may be more pru­dent for some com­pa­nies to forego claims alto­geth­er.

Lisa Dowl­ing, senior VAT man­ag­er at Taxback Inter­na­tion­al, explains: “A no-deal Brex­it will cer­tain­ly be a step back­wards for the for­eign VAT recov­ery process with UK busi­ness­es being hit hard­est in admin­is­tra­tive bur­den, missed VAT reclaim oppor­tu­ni­ty and over­all cost to com­ply with the appli­ca­tion process.

“This added bur­den to the reclaim process will see a fall-off in the amount of EU VAT claimed by UK busi­ness­es as they sim­ply won’t have the resources to ded­i­cate to the paper-based, man­u­al process.”

It is a view shared by Mr Roberts. “For some busi­ness­es, over­seas VAT will just be writ­ten off. For those that make sub­stan­tial claims, con­tin­gency plan­ning needs to start now,” he says.

“Whichev­er route is tak­en, the cost of mak­ing cross-bor­der VAT claims will inevitably increase if a no-deal Brex­it hap­pens and for some will no longer make finan­cial sense.

Implications for corporate tax still unknown

Mean­while, as the new Octo­ber 31 Brex­it dead­line approach­es amid con­tin­ued uncer­tain­ty, busi­ness­es can only try to sec­ond guess poten­tial cor­po­rate tax impli­ca­tions.

Some have already, or are active­ly con­sid­er­ing, open­ing EU-based offices to ease pos­si­ble future trade bar­ri­ers between the UK and EU, and need to know the tax impli­ca­tions.

“If we leave the EU with­out a deal, the tax­a­tion of pay­ment flows with­in groups with UK enti­ties would be a par­tic­u­lar issue, due to com­plex­i­ties sur­round­ing VAT and cus­toms,” explains Arun Bir­la, tax part­ner at law firm Paul Hast­ings.

“There is also a poten­tial for busi­ness­es to expe­ri­ence ‘dou­ble tax­a­tion’, as remain­ing EU coun­tries may seek to take advan­tage of the UK’s sep­a­ra­tion from the euro­zone, lead­ing to the spec­tre of dou­ble or mul­ti­ple tax­a­tion with respect to the same prof­its or activ­i­ties.”

Abi­gail Agopi­an, prin­ci­pal tax advis­er at the Con­fed­er­a­tion of British Indus­try, says while cus­toms issues often dom­i­nate head­lines, Brex­it could have a sig­nif­i­cant impact across oth­er tax­es busi­ness­es pay.

“One com­mon issue, if the UK leaves with­out a deal, is that it los­es access to EU direc­tives overnight. This could mean some firms that aren’t cur­rent­ly required to with­hold tax on pay­ments of div­i­dends, inter­est and roy­al­ties, sud­den­ly have to do so as a result of the UK’s new sta­tus,” says Ms Agopi­an.

“The net result of los­ing access to EU direc­tives could be an increased tax bur­den for UK busi­ness­es that are heav­i­ly involved in invest­ment and trans­ac­tion flows with­in the EU. At best this could impact cash flow, at worst it could mean sig­nif­i­cant cost increas­es for those unable to obtain a full tax cred­it for the tax with­held.”

Limited tools available for companies to plan

The frus­tra­tions that stem from Brex­it tax plan­ning may be even more acute for small and medi­um-sized enter­pris­es as many small­er com­pa­nies lack in-house tax spe­cial­ists with the breadth of expe­ri­ence and know-how to sup­port Brex­it plan­ning.

For some busi­ness­es, over­seas VAT will just be writ­ten off

Andy Mur­ray, man­ag­ing direc­tor of tax con­sult­ing with­in the com­pli­ance and reg­u­la­to­ry con­sult­ing prac­tice at Duff & Phelps, says busi­ness­es may be tempt­ed to hold off mak­ing any con­tin­gency plans around tax­es. There are very lim­it­ed tools cur­rent­ly avail­able for busi­ness­es to help them plan for Brex­it, apart from the use of advis­ers, accord­ing to Mr Mur­ray.

Nev­er­the­less, Mr Bir­la says there must be some ele­ment of plan­ning to make sure busi­ness­es are as pre­pared as pos­si­ble for when there is a clear­er out­come.

Should business be planning for the “worst case scenario”?

For Tim Sar­son, tax part­ner at KPMG, there is no point in a busi­ness plan­ning for five pos­si­ble out­comes.

“In the absence of clear infor­ma­tion and guid­ance on what’s going to hap­pen, you’re going to tend to plan for the worst-case sce­nario and the worst-case sce­nario is no deal,” he says.

Mike Hodges, part­ner at Saf­fery Champ­ness, says as part of Brex­it plan­ning, many busi­ness­es will be con­sid­er­ing how best to safe­guard their sup­ply chains, includ­ing estab­lish­ing a phys­i­cal pres­ence in the EU once the UK leaves.

“There will clear­ly be tax impli­ca­tions for those that do choose to expand into the EU and this is like­ly to result in a lev­el of com­plex­i­ty many won’t have faced before,” he cau­tions.

Mr Sar­son says HM Rev­enue & Cus­toms has already been active­ly assist­ing UK busi­ness­es with their tax plan­ning ahead of the new Brex­it dead­line by issu­ing detailed guid­ance on cus­toms duty and cus­toms com­pli­ance, for exam­ple.

But as Nick Farmer, tax part­ner at accoun­tan­cy firm Men­zies, says: “If no deal is like­ly, at the very least busi­ness­es would like a rea­son­able win­dow of time to plan for this.”