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Q&A – Brexit and the future of UK VAT refunds after 31 December 2020

Q&A – Brexit and the future of UK VAT refunds after 31 December 2020

With the Brexit transition period ending on 31 December 2020, the United Kingdom will no longer be part of the European Union (EU). Consequently, many tax rules between the EU and the UK will change or no longer apply, among others, the rules for VAT refunds. These changes affect EU-based businesses, businesses established outside the EU such as the US, Switzerland and China, and UK businesses.

With only a few weeks left to conclude the trade agreement between the EU and the UK, it is still uncertain whether such an agreement will be concluded and, if so, what will be the practical implications for businesses involved in UK cross-border trade.

The VATBox Tax Knowledge team is following the developments closely. It is also involved in a pilot to test a digital VAT refund application procedure that may be implemented post-Brexit if the pilot is concluded successfully. Yet, our clients and network have many questions on preparing for “the day after” regarding foreign VAT refunds to or from the UK.

We prepared this Q&A for you, addressing the most frequently raised questions.

How to submit the request for foreign VAT refund incurred in 2020?

Based on the rules agreed for the transition period between the UK and the EU, foreign VAT refunds between the UK and the EU Member States can still be applied for through the current electronic EU VAT refund system (Directive 2008/9/EC or Directive 9). The portals for submitting such requests to and from the UK and the EU Member States will remain open until 11 pm on 31 March 2021.

We advise not to wait till the very last minute since we typically see high activity around such deadlines. The authorities’ servers cannot always cope, causing server time outs that result in you not being able to submit your claim. Despite such technical issues, “late” is usually taken by the receiving authority of refund really as “late.”

What is the foreign VAT refund deadline due to Brexit between the EU and the UK?

Although the UK will leave the EU as a Member State by 31 December 2020, the electronic EU VAT refund system will remain available until 31 March 2021 for EU businesses wanting to claim 2020 UK VAT and for UK businesses wanting to claim 2020 EU VAT.

What will be the foreign UK VAT recovery procedure after 31 December 2020?

The process for receiving VAT refunds from the UK from 2021 and onwards is still unclear.

Without an alternative solution, the fallback is that the UK can use the current “Directive 13 process” for foreign UK VAT refunds. Although Directive 13 is EU legislation and will no longer apply to UK foreign VAT refunds, the infrastructure for this process is already fully embedded at the UK tax authorities (HMRC). Although it would legally not be the “13th Directive anymore, it would be the logical fallback for foreign UK VAT refunds.

However, the big pain point for both businesses and HMRC is that this process is entirely paper-based. For EU businesses, it would mean that a current digital process will move back to a full paper-based process, which requires obtaining and retaining hard copy receipts as well. And yes, even if the invoice was originally received as an electronic invoice, it still needs to be printed and submitted in hard copy in that process.

However, although we can’t confirm anything yet and therefore businesses should not take chances, VATBox is currently involved in a pilot with HMRC to test a new electronic submission process. Since this new electronic solution is still in the pilot phase, there are currently no guarantees that it will be implemented after Brexit. Yet, it is a good sign that HMRC is working on an alternative application solution behind the scenes. You can learn more about the pilot here. The pilot is running for eight weeks until 13 November 2020, and we will update you once the outcomes are available.

Please note that HMRC explicitly stated that although the pilot is around the full digital submission of foreign UK VAT refunds, the requirement to archive the hard copy invoice will continue to apply for applications submitted in this pilot phase.

What will be the foreign EU VAT recovery procedure for UK businesses after 31 December 2020?

With the Brexit transition period ending on 31 December 2020, many tax rules between the EU and the UK currently based on EU legislation will change or no longer apply. This applies not only to foreign UK VAT refunds but also to EU VAT refunds to UK businesses. While today, UK businesses can still use the electronic EU VAT refund process (Directive 2008/9/EC or Directive 9), with no alternatives, the fallback for UK businesses wanting to claim VAT from EU countries will have to follow the procedures as set by the 13th Directive. The biggest pain point in that process is that the applications have to be submitted in paper form with all the original receipts.

What will be the impact of reciprocity?

Reciprocity is a principle applied by some countries. It means that these countries only allow tax refunds to other countries’ citizens or businesses if those countries allow similar tax refunds to that country’s citizens and business, i.e., the refunds have to be mutual.

Between the EU Member States, there is full reciprocity, meaning there are no limitations for VAT refund for EU businesses when it comes EU VAT. Therefore, a foreign EU business is treated the same in the EU country of VAT refund as a local business in that country.

However, after Brexit, the UK will no longer be an EU country; therefore, this reciprocity may become an issue. The only way to avoid it is if the European Commission will collectively agree on reciprocity with the UK government on behalf of all EU Member States, or if EU Member States will conclude such reciprocity bilaterally with the UK.

Therefore, it is important to review your supply chain and assess whether reciprocity could impact your current foreign VAT refund process and cashflow.

Do I need to keep hard copies?

As long as no new regime is put in place either by the EU Member States when it comes to VAT refunds to UK businesses, and or no new regime is put in place by HMRC when it comes to UK VAT refund to EU businesses, then hard copy archiving requirements will continue to apply.

 That is a lot of information. Would you have a simple overview?

We realise that VAT has never been easy, and all the uncertainty around Brexit does not make it better. So to help you to get your head around it, we created this table.

 

 

2020 VAT: Until 31 December 2020 2020 VAT: Until 31 March 2021 2020 VAT: Beyond 31 March 2021 2021 VAT: starting 1 January 2021
UK VAT refunds To EU companies EU VAT refund portal / D9 EU VAT refund portal / D9 Hard copy process similar to D13
or a new electronic process
Hard copy process similar to D13
or a new electronic process
To non-EU companies 13th Directive Hard copy process similar to D13
or a new electronic process
Hard copy process similar to D13
or a new electronic process
Hard copy process similar to D13
or a new electronic process
EU VAT refunds To EU companies EU VAT refund portal / D9 EU VAT refund portal / D9 EU VAT refund portal / D9 EU VAT refund portal / D9
To UK companies EU VAT refund portal / D9 EU VAT refund portal / D9 13th Directive 13th Directive
To non-EU companies 13th Directive 13th Directive 13th Directive 13th Directive

 

Download a printable cheat sheet

Trade talks are taking place on an ongoing basis, and the VATBox Tax Knowledge team is following these closely. We will publish any important updates regarding the VAT refund processes as soon as possible, or your Customer Success Manager will contact you directly.

 For any questions, contact your dedicated Customer Success Manager, or contact VATBox’s Support team directly via the VATBox portal. If you’re not a member of the VATBox community fill out this form, and one of our experts will get back to you shortly.

 

Thank you,

Stay healthy and connected

 

Remco Dewaerheijt
VP Tax & Product Strategy, VATBox

Using his extensive experience as both a tax lawyer and an in-house VAT expert, Remco leads the Tax Knowledge team and VATBox’ European Headquarters in Amsterdam. Before joining VATBox, Remco led the VAT team of PPG Industries and advised mainly US clients at Baker & McKenzie on how to optimise their European VAT supply chain. Remco holds a master’s degree in Taxation and is a certified tax advisor.

 

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