Understanding Brexit and cross-border VAT

Today, a UK business has the opportunity to recover VAT paid on certain expenses in another EU country via a mechanism known as the Refund Directive. This may not be the case in a potential post-Brexit scenario

 Understanding Brexit and cross-border VAT

Today, a UK business has the opportunity to recover VAT paid on certain expenses in another EU country via a mechanism known as the Refund Directive. This may not be the case in a potential post-Brexit scenario

Unless they have managed to get their hands on a fully functioning crystal ball, most financial controllers and small business directors will have no idea what way the referendum vote on Britain remaining in, or leaving the EU will go.

Given the enormous implications Brexit would have on the UK economy, it’s important that all the possible implications that could affect businesses in the UK are considered. In this article, we review what the impact may be on the VAT recovery opportunity for:

  • UK businesses dealing with EU countries

  • Businesses from EU countries dealing with the UK

  • Businesses from non-EU countries dealing with the UK

If the decision falls to leave the EU, the UK will no longer be covered by the Refund Directive and will become a 13th Directive country for the purposes of foreign VAT recovery. In simple terms, this changes what, how and when VAT can be claimed and would bring with it repercussions for UK small businesses that lead to incremental costs in doing business.

UK businesses claiming VAT from EU countries

Today, a UK business has the opportunity to recover VAT paid on certain expenses in another EU country via a mechanism known as the Refund Directive. The Refund Directive provides the basis for what can be claimed and how. One of the great benefits of the Refund Directive for EU based claimants is that it allows your claims to be submitted electronically to all EU claim countries via a business’s home country’s online claim portal. Once submitted, claims are then distributed, for example by HMRC, to all the EU VAT authorities on the company’s behalf. While all claims are submitted electronically, businesses can still be asked to provide originals to prove the validity of their claims. 

However, if the UK were to leave the EU then UK businesses would have to submit all claims in paper form with all supporting documentation and original invoices, directly to each individual EU VAT authority, as it will no longer be covered by the Refund Directive. This is, as one can imagine an onerous, cumbersome and time intensive task that is in direct contradiction to what the EU wants to achieve – automation, increased productivity and smart insights.

There is also the possibility that some EU countries will no longer allow UK businesses to reclaim VAT that they could previously recover as an EU member, a further burden to UK businesses

Businesses from EU countries dealing with the UK

Currently businesses from other EU member states have the opportunity to recover VAT paid on certain expenses incurred in the UK. Just as above, the Refund Directive provides the basis for what can be claimed and how. While this would not change for EU businesses claiming VAT from other EU countries, in the case of claims for VAT being made to the UK things would change.

To what extent things would change is unknown. As the UK would no longer be a member state it would not be covered by either the Refund Directive or the 13th Directive. The UK would have to decide whether or not it wishes to continue allowing foreign businesses to recover UK VAT. There are examples of other European non-EU countries that currently allow foreign businesses to recover VAT on expenses incurred – such as Norway and Switzerland. But there is no guarantee that the UK post Brexit would decide to continue.

If the UK decided not to allow foreign businesses to recover VAT post Brexit then there could be repercussions, as other EU member states could apply the principle of reciprocity i.e. if the UK won’t give refunds then neither will they. This could be one of the less significant impacts. The larger impact would be on the total cost of doing business with the UK as the VAT can be recovered today is not just on travel related costs, there is still VAT on some large ticket AP items that is recovered today and this could also go away.

Businesses from non-EU countries dealing with the UK

Currently businesses from non- EU countries have the opportunity to recover VAT paid on certain expenses incurred in the UK. However, these businesses must submit their claims via the 13th Directive which governs what can be claimed and how. If the UK decides to leave the EU then these businesses will also be left waiting to see if the UK decides to continue allowing the recovery of VAT.

If a company is currently recovering VAT from the UK the impact on that business should be quantifiable as it should be able to calculate from current and recent refunds how much is potentially at stake. Depending on how it is currently handling such claims this calculation could be quite straight forward or a bit more of a struggle.

o date contingency planning for a possible Brexit has involved companies tightening their belts in the face of uncertainty, but there are many hidden costs that businesses need to brace themselves for – the above is just one potential implication.

This joint article was written by Derek O’Brien, group head of marketing, Meridian and  Dafydd Llewellyn, managing director, UK SMB, Concur.

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