“BREXIT” – Consequences for VAT

Since “BREXIT”, the United Kingdom’s exit from the European Union (EU), Companies with supply and service relationships with the United Kingdom of Great Britain and Northern Ireland face tougher rules for VAT purposes. Any previous VAT regulations based on EU law are no longer applied from January 1, 2021. While on December 24, 2020, the parties reached an agreement on a trade deal preventing a hard “BREXIT” at the last minute, difficulties in connection with VAT rules remain.

The German Federal Ministry of Finance (Bundesministerium der Finanzen, BMF) has already commented on the VAT consequences of the BREXIT in its letter of December 10, 2020.

In the following we would like to summarize the impact of the BREXIT on businesses with trading partners in the United Kingdom from a VAT perspective.

1. United Kingdom becomes a third country

According to the BMF the United Kingdom will have the status of a third country for VAT purposes from January 1, 2021. This has particular implications for the taxation of trade in goods and services (see under III.). The concluded trade agreement has no effect on VAT. The United Kingdom remains a third country for VAT purposes. However, the agreement includes a number of customs regulations. The customs borders between the UK and the EU remain in place. When goods cross the border, import and export declarations must be submitted and the movement of goods is subject to border controls. However, the agreement provides for an exemption from import duties for goods that have their preferential origin in the other territory. Therefore, goods with preferential origin in the UK can be imported duty-free into the EU and vice versa.

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2. Northern Ireland becomes third country for services, remains EU country for deliveries

Northern Ireland, on the other hand, has a special status: while Northern Ireland is treated as a third country in trade in services, it continues to be considered part of the EU Community territory in trade in goods. Accordingly, a new VAT identification number (VAT ID) will be created for Northern Irish traders. Accordingly, for entrepreneurs from Northern Ireland, “XI” is to be prefixed as the country code instead of “GB”. In all other respects, the existing regulations for intra-Community trade in goods in Northern Ireland remain in force.

3. VAT effects at a glance

From January 1, 2021, domestic traders will require different proof of the entrepreneurial status of their UK contractual partners. Therefore, if required, confirmation requests for British contractual partners should have been submitted to the Federal Central Tax Office (Bundeszentralamt für Steuern, BZSt) according to Sec. 18e German VAT Act (Umsatzsteuergesetz, UStG) by December 31, 2020.

1. Effects on the movement of goods

• Tax-exempt intra-Community supplies to Great Britain become tax-exempt export supplies if the relevant requirements are met. This is associated with the following changes in particular:
  • Other obligations to provide evidence,
  • Other tax exemption regulations: If, for example, the customer transports the goods, the supply is only tax-exempt if it is a foreign customer (Sec. 6 (1) no. 2 UStG).
  • Other invoice references,
  • Other tax codes,
  • No indication of these transactions in the recapitulative statement,
  • Customs declarations for goods shipped cross-border to or from the UK (usually via the IT customs procedure ATLAS)
  • No intrastate messages
  • Statistical reports are made – according to current knowledge – if necessary via the corresponding customs declarations.
  • On the other hand, for VAT purposes, intra-Community deliveries or acquisitions of goods with Northern Ireland will continue to be made and the corresponding turnover will be reported in the recapitulative statement and in the intra-trade statistics using the country code “XI”. In addition, no customs declarations are to be made, although Northern Ireland, as a part of the United Kingdom, also no longer belonges to the EU.
• Intra-Community shipments to the United Kingdom are usually so-called non-trivial third-country shipments. However, certain customs procedures may be suitable here.
• Intra-Community acquisitions become imports (possibly import duties such as customs and import VAT, import declaration usually via the IT customs procedure ATLAS). Corresponding contracts should be checked to see who has to bear the customs duties economically (e.g. on the basis of agreed Incoterms) and what the consequences are of delays in delivery due to customs clearance. Please note, for example, that the place of performance for duty-paid and taxed deliveries from the United Kingdom generally shifts to Germany (Sec. 3 (8) UStG).
• For chain transactions from the UK to Germany, tax exemption of the delivery before importation may be considered (Sec. 4 no. 4b UStG). Conversely, an import VAT exemption in the so-called “42”-procedure is ruled out for chain transactions from Germany to the UK (Sec. 5 (1) no. 3 UStG).
• German companies need a British EORI number when filing customs declarations in the UK (application possible online at: www.gov.uk/eori).
• The simplification rule for intra-Community triangular transactions is no longer applicable.
• Transitional arrangement: For cross-border movements of goods between Germany and the UK that began before January 1, 2021 and ended after December 31, 2020, the rules for the taxation of intra-Community trade in goods are to be applied. Accordingly, for deliveries beginning before January 1, 2021, a VAT registration number for traders resident in the United Kingdom (country prefix “GB”) must be used.
• Neither the BMF nor the BZSt have yet explicitly commented on the consignment warehouse regulation (Sec. 6b UStG).

2. Effects on trade in services

• Incoming services: If German companies purchase other services from British companies, the so-called place of receipt principle applies and thus, in principle, the tax liability is shifted to the German company (reverse charge procedure). Exceptions to this are the so-called “use & enjoyment”-services, for which the place of performance and thus the taxability shifts to Great Britain if the service is used there.
• Outgoing services: How other services from German traders to British traders will be treated from 2021 depends on the concrete form of the new British regulations:
  • Reverse charge procedure, if applicable
  • Registration in Great Britain, if applicable
  • No indication of these transactions in the recapitulative statement
• Continuous services: If the provision of another service begins before January 1, 2021 and ends after December 31, 2020, the circumstances at the time of termination shall be decisive for the assessment of the entire service. This applies accordingly to partial benefits.
• Cross-border transport services: Cross-border goods transport services to and from Great Britain are tax-exempt (Sec. 4 no. 3 letter a double letter aa or bb UStG). This does not apply to transport services that are merely ancillary to the delivery of goods. In this case, exports are regularly tax-exempt.
• Travel services: From January 1, 2021, travel services provided in the United Kingdom will be tax-exempt under section 25 (2) UStG. In the case of travel over the turn of the year, there may be difficulties in delimiting the time of performance. While the end of the trip is decisive, in practice the departure is often used. In view of the Corona-related travel restrictions, this is probably a minor problem.

3. Effects on input tax

In principle, a distinction must be made between remuneration to entrepreneurs from the third country and from the Community territory. In this respect, the BREXIT will have the following consequences:

• Input tax amounts incurred before December 31, 2020 must be claimed in the EU’s electronic refund procedure. In deviation from the otherwise applicable deadlines, an application deadline of March 31, 2021
• Input tax amounts that arise after December 31, 2020 can only be claimed in the “third country procedure”. This means that German entrepreneurs must then directly contact the competent authorities in Great Britain or Northern Ireland.
• Regarding input tax refunds, the special features for Northern Ireland (third country status for services, EU status for supplies) must be taken into account.
• Input tax refunds for input tax incurred after December 31, 2020 require special attention due to the different regulations for Great Britain and Northern Ireland and due to Northern Ireland’s special dual status. If the input tax is claimed in the wrong procedure, this can lead to a failure of the input tax deduction – especially if the deadline has expired in the meantime. The entrepreneur would then finally be economically burdened with the VAT paid on his input services.
• Further information on the practical treatment of applications for input tax refund before and after the UK’s withdrawal from the EU can also be found on the internet pages of the BZSt under the heading Businesses/Sales Tax/Input Tax Refund (https://www.bzst.de).

4. Further points

Furthermore, the BMF letter comments on the following points:

• Termination of the Mini-One-Stop-Shop (MOSS) procedure for certain services with last opportunity to report by January 20, 2021. Further information on the practical treatment of tax returns prior to the UK’s withdrawal from the EU and corrections to tax returns after withdrawal can be found on the website of the Federal Central Tax Office under the heading Companies/Sales Tax/Mini-One-Stop-Shop (https://www.bzst.de).
• Liability for turnover tax when trading in goods on the internet (Sec. 22f, 25e and 27 (25) UStG)
• Processing of requests for administrative assistance

4. Practical advice

Entrepreneurs with supply or service relationships with the United Kingdom have to follow the amended rules from January 1, 2021 in terms of VAT and customs law.

Entrepreneurs who have previously traded purely within European partners face a major challenge here. Specifically, in addition to adjustments to master data, invoice templates and tax codes, attention must also be paid to the correct and timely application of the input tax refund procedure. The BMF letter provides some practical advices but leaves questions unanswered. If necessary, these will be answered with the already announced further BMF letter, which is to adapt the VAT application decree accordingly.

We would be happy to support you not only in VAT-related questions but in all tax and legal matters. Get in touch with us.

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