This blog was last updated on August 2, 2021
In the wake of the UK’s unprecedented decision to leave the European Union, multi-national companies are left wondering, “What does it mean for us?” The good news is businesses will likely have at least two years to prepare, and potentially longer if the UK delays the process until October to select a new Prime Minister. Furthermore, given the UK’s need to continue free and easy trade with Europe, the country is likely to tread lightly on measures that could scare business away. A critical, but often overlooked, impact of the move away from the EU, though, is in the area of Value Added Tax, the predominant consumption tax used throughout Europe that applies at each stage of the production process. While some industries, including manufacturing, retail and software, could be impacted more than others, the ripple of VAT change could rattle the financial foundation of a wide range of companies, particularly the large group of multi-national companies that use the UK as a beachhead for selling into Europe. There is still very little detail on what will change – and no precedent to glean from. But, based on the current VAT landscape, we’ve identified eight possible impacts on business in the UK.
1. Increased tax obligations for cross-border trade
Currently, companies can ship goods across the border duty-free, but that could possibly change, adding up to 17% duty to imports and exports between the UK and the EU. In addition, a company’s ability to defer VAT payment could disappear, eliminating substantial cash flow benefits that exist in the current EU VAT regime.
2. Complications for companies with triangular supply chains
Current rules allow for a single VAT payment when companies operate across three or more countries and meet other “simplification” requirements. Those rules would no longer apply when a UK entity is involved in the chain, increasing compliance costs for many businesses that involve UK entities at any point in their supply chain.
3. UK suppliers could be treated like any other non-EU supplier
Current distance sales rules for the supply of goods from the UK to consumers in other EU Member States will cease to be applicable in the UK. After the Brexit, UK suppliers will be treated like any other non-EU supplier, meaning those companies will likely run into a variety of issues when trading good with the EU, including fiscal representation, import formalities and other complex VAT administrative burdens.
4. More complexities for e-services companies; new questions about EU headquarter locations
Companies in “e-services,” including software and music downloads, who have taken advantage of the simplified MOSS scheme and registered in Britain, would need to move to/register in an EU country. Brexit may lead to economic development opportunities for English speaking countries that are members of the EU, including Ireland and possibly Scotland and Northern Ireland in the future.
5. An unclear future for Scotland and Northern Ireland
The head of the Scottish Government has declared that a new referendum on Scottish independence is “highly likely” following the Brexit vote. Some politicians in Northern Ireland have made similar calls for independence. Both Scotland and Northern Ireland voted in large numbers for the “Remain” side. If Scotland were to leave the United Kingdom, it would likely seek to become an EU Member State. While this would likely take many years, it would both lead to VAT complications for companies that operate across the whole of the United Kingdom and provide new options for European operational bases in English speaking countries.
6. Significant changes to reporting processes and systems
Fundamental Value Added Tax structures don’t change often. As a result, the systems used by many companies to report, are not built to handle an overhaul. Yet, that’s exactly what many companies will need to do, forcing IT teams to re-configure ERP systems and re-work reporting processes. In addition, while UK businesses would no longer be required to file Intrastat. Reports or the EC Sales List, Brexit could lead to unknown and complex business-to-government reporting requirements in the UK.
7. More volatile VAT rates for many products
With fewer restrictions on product taxability currently tied to EU membership, companies could experience more changes to UK VAT rules and rates based on the economic needs and public policy concerns within the UK. Proponents of the “leave” vote have long promoted VAT on fuel tax as an area appropriate for zero rating, and it’s likely that would receive some attention in the early going.
8. Accelerated VAT reform in the European Union
With the UK no longer involved, there may be less resistance to VAT reform in the EU, which is aimed at simplifying compliance and reducing fraud. The “Action Plan” submitted earlier this year was complicated by some unique demands by the UK. This week’s vote may make it easier for the remaining member states to implement the reform, which would include a single EU VAT area, simplified origin-based reporting and possibly mandated electronic reporting.
What can businesses do now to prepare?
As the puzzle pieces fall into place, many business leaders are scrambling to understand their risk profile. Yet, with no precedent to lean on, there are more questions than answers. So, what can businesses do right now to prepare for whatever comes next? Here are three things businesses are doing to prepare: Evaluate the risks. Every company’s risk profile is different. But, if your business falls into one of the categories listed above, it’s never too early to start quantifying the risk associated with the UK’s departure. Review existing systems. Value added tax is one of the most complicated business-to-government compliance operations, and most systems are not built to support changes to that process. Multi-national companies will need to review the efficacy of ERP-based solutions and VAT filing processes to make sure those tools are adequate in a new, more complex tax environment. Build a comprehensive business-to-government compliance strategy. In addition to the changes in the UK, Europe is poised to implement a wide-reaching set of changes to its tax regime, adopting technology to improve its regulations and enforcement tools. As the regulatory environment continues to evolve, businesses are taking the time to establish complete and central compliance strategies to protect against future liabilities.
