The VAT Implications Of Brexit For Services

12 January 2021

Most of the commentary about indirect tax changes arising from the end of the Brexit withdrawal period has been on the movement of goods between the UK and EU and vice versa. While not as high profile or as wide-ranging, there were also changes relevant to organizations providing services. 

VAT Changes To Services From 1 January 2021

Generally, most of the UK’s VAT rules applicable to organizations providing services remain unchanged by the end of the Brexit withdrawal period. Specifically, there were no widespread changes to the place of supply provisions (rules that determine the country in which VAT is paid) or rates of VAT. However, changes were made in the following seven areas:

•  Billing International Customers – Generally, UK organizations providing services to overseas customers should find getting the correct UK VAT treatment easier, as there is no longer a need to distinguish between customers resident in the EU and outside of the EU. While there remain exceptions (including services related to land, digital services, admission to events, and telecommunications), the general rule is that professional services (such as legal and consultancy services) billed to customers outside of the UK will be outside the scope of UK VAT. It’s worth nothing that  care should be taken when invoicing for work completed in 2020 but only being invoiced in 2021; in this situation, the “new” rules may not apply, and professional advice to confirm the correct VAT treatment is recommended. 
•  Digital Services – UK sellers of digital services to EU consumers can no longer account for EU VAT via a UK Mini One-Stop-Shop (MOSS) VAT return. UK organizations will either need to VAT register in each EU Member State where they have customers or consider whether they can apply the Non-Union MOSS scheme by registering for VAT in the EU. Any non-EU organization which used a UK MOSS registration to pay EU VAT will have to re-register for MOSS in the EU and separately in the UK under a regular VAT return. The same is also true for EU organizations who will need to UK VAT register to account for UK VAT on sales of digital services to UK based consumers, as they can no longer account for UK VAT via an EU MOSS return. 
• Use And Enjoyment Rules – The UK is now a 3rd country to the EU. This means UK organizations trading with customers in the EU will need to assess whether there are “Use and Enjoyment rules” in each Member State that apply to their activities and may require the UK supplier to VAT register and account for local VAT in the EU. This will need to be checked on a country by country basis as each EU Member State can set its own rules as to what services are subject to Use and Enjoyment. Similarly, EU organizations providing services such as telecommunications services, broadcasting services, electronically supplied services, the hire of goods, and the hire of a means of transport to UK customers may now have an obligation to register for VAT in the UK. 
• Reclaiming VAT On Financial Services Supplies – UK organizations providing certain financial services will benefit from increased VAT recovery under an extension of the “specified supplies” rules. Previously, these rules only applied when a UK organization provided certain services to non-EU customers. The “specified supplies” provisions have been extended to include sales to non-UK customers. 
• Recovery Of EU VAT – There are changes to how UK organizations reclaim EU VAT in countries where they are not required to be VAT registered. Previously, such claims were made under a common EU VAT reclaim process. Moving forward, reclaims are still possible, but they will need to be made directly to the local overseas tax authority. Be aware that there may be changes to the time limits of when claims can be made and different procedural requirements. 
• Appointment Of A Fiscal Representative – Any UK organizations registered for VAT in an EU Member State in which they are not resident may have to appoint a fiscal representative. This will increase compliance costs, as the fiscal representative will charge for its services and will also require a bank guarantee to be provided, given the fiscal representative is jointly liable for any VAT debts. To date, there is inconsistency in the EU Member States as to whether or not this is required, and so the position in each country should be reviewed. 
• Tour Operators Margin Scheme (TOMS) – TOMS is an EU VAT simplification intended to avoid the need for organizations selling holiday and travel packages to VAT register in each of the EU Member States where part of the package takes place. HMRC has confirmed that the UK will retain its TOMS rules and that package holidays in the EU will be subject to zero-rated UK VAT, and UK holiday packages will be subject to the standard rate of UK VAT. 

The end of the Brexit withdrawal period has resulted in many UK VAT rule changes, and organizations will need to adapt to new VAT accounting arrangements. It’s recommended  that organizations review their sales and purchase transactions and administrative processes to ensure that any changes to the VAT rules have been identified. This will help guard against unexpected costs.