Brexit: the effects of a no deal
The United Kingdom left the European Union on 31 January 2020 after 47 years of EU membership. The withdrawal agreement provides for a transition period ending on 31 December 2020 during which EU rules will continue to apply, thereafter the UK will officially become a third country.
Negotiations on the partnership agreemen18t to govern the future relationship between the EU and the UK are still ongoing, but with the end of the year and several issues still unresolved, the possibility of a “no-dea” between the two countries seems inevitable, so that the European Commission itself stated in its recent press release that “there is considerable uncertainty as to whether an agreement will be in force on 1 January 2021“.
So what can we expect from 1 January 2021? On last 9 July, in a communication entitled “Preparing for the turnaround“, the Commission published a detailed overview of the main sectors that will inevitably be affected (with or without an agreement) by the UK’s exit from the EU. Among the negative effects in the event of withdrawal without a formal agreement between the UK and the EU are the consequences in relation to the VAT system applicable to the supply of goods and services between the two countries.
Supply of goods
From 1 January 2020 the UK will no longer be covered by the Directive on the EU system of value added tax (“VAT Directive”) or the Directive governing VAT refunds. This means that those who currently purchase goods from the UK and place them on the EU market will qualify as importers while those who currently distribute products in the UK will be identified as exporters.
Supplies and movements of goods between the EU and the UK will therefore be subject to the Customs Code and therefore subject to conformity checks by the relevant administration. About imports into the territory of the EU, pursuant to Article 94 of the VAT Directive, the tax will be due at the time of introduction of the goods from the UK into the VAT territory of the EU, at the rate applicable to supplies of the same goods from the EU country. The taxable amount will therefore be the value of the goods at customs, plus taxes, duties, levies, and incidental expenses for transport, insurance, etc., which will be charged on the goods.
Exports will also be subject to the European Customs Code and subject to verification by the Customs Administration before leaving the Community territory. In this case the goods will be exempt from VAT under Article 146 of the Directive and the burden of proving that the goods have in fact left the Community will be on the exporter. It is worth noting that for consignments and transport of goods to or from the UK that started before the end of the transitional period but ended after 31 December, Article 51 of the Withdrawal Agreement will apply, according to which these transactions will still be considered as intra-Community transactions and will therefore not fall under the rules governing exports and imports.
Those sectors for which the exercise is subject to licences issued by the UK authorities will also suffer the consequences of a “no deal”. As of 1 January 2021, such authorisations will no longer be valid in the European Union and, to access the Community market, service providers and professionals established in the UK will have to demonstrate compliance with all the rules, procedures and/or authorisations subject to the exercise of the activity for non-residents.
The activities of financial services, audiovisual media and energy services will therefore be severely affected. Nor will road transport services be spared: if they are established in the UK from 1 January 2021, they will no longer hold an EU licence and will therefore no longer be able to benefit from the automatic access rights to the single market that this licence entailed.
From a VAT perspective, EU law provides for regimes that differ according to the place where the service is deemed to be provided. The VAT Directive refers to this based on various factors such as the nature of the service, the nature of the customer, the place where the service is provided, etc. It is therefore difficult to give a complete overview of all the rules relating to the “place of supply of services” in force from 1 January 2003. To put it simply: if the place of supply of services is in a Member State, the service will be subject to VAT in that Member State under the terms and conditions of the VAT Directive. If, on the other hand, the place of supply of services is in the UK (or another third country/territory), the supply will not be subject to EU VAT.