This blog was last updated on February 2, 2024
Synopsis: As Brexit is now becoming a reality with a new Prime Minister and more formal discussions, what will this mean for your organization? It may impact how you pay taxes and when as well as cross-border transactions. You will most likely have to change your internal tax compliance processes to account for the UK changing their tax structure, which will most likely require extensive internal resource allocation to cope with these reforms.
Even though the Brexit withdrawal of the UK from the EU may take more than two years, multi-national companies and other organizations are still looking to assess how this will affect how they conduct business. How will things change and how will value added tax (VAT) transactions be affected? Since the current EU VAT Directive applies broadly to both goods and services, almost every type of transaction could potentially be affected by Brexit. But, the most immediate effect would likely be on cross-border transactions, including triangular transactions. Goods and services flowing between a post-withdrawal UK and the EU would be treated as imports/exports rather than intra-Community transactions. This could result in the obligation to pay VAT to customs immediately upon importation, thus eliminating cash flow benefits inherent in the single market.
Could Brexit Bring New Reporting Requirements for Organizations?
Yes. For businesses conducting cross-border trade between the UK and the EU, Intrastat and EC Sales List compliance requirements could be replaced with new and potentially more complex requirements, reflecting the transition to an import/export system. In addition, companies that engage in triangular transactions involving the UK would face new registration, calculation, and reporting requirements.
What Will Happen to Triangulation Simplification?
The EU VAT Directive applies a simplification scheme (“triangulation simplification”) to three-party transactions where a middleman in Member State B arranges for a supply of goods between companies in Member State A and Member State C. Without simplification, the middleman would be required to register for VAT either in Member State A or, more commonly, in Member State C, depending on which party arranges for transport. The simplification scheme removes this requirement. However, the simplification scheme only applies when all three parties are in EU Member States. This would no longer apply following Brexit, where one of the three countries involved is the UK. For example, a three-party transaction between Country A, the UK, and Country C would no longer be subject to triangulation simplification, and the UK middleman would likely need to register in Country C and self-assess VAT there. The middleman would also be required to collect VAT in Country C from the final customer, unless a domestic reverse charge applies. In order to fully comply with these registration and reporting obligations, the UK middleman would have to learn and understand Country C’s VAT laws. For companies conducting triangular transactions in several different EU countries, this could represent a substantial barrier to trade. This would also mean that Brexit would add new compliance burdens for businesses involved in multi-national supply chains, where any part of the chain is in the UK. To learn more about VAT triangulation, we encourage you to download our white paper. We also encourage you to think about how your businesses may be impacted by Brexit, by reading our “Eight Ways Tax Changes Could Affect Businesses in the UK and Europe After Brexit” blog. At Sovos, we will continue to help you plan, prepare and think about how to adjust your operations so sign up to our blog as we monitor and inform you on relevant Brexit topics.
