This blog was written by Gareth Kobrin, Executive Director of VAT IT Group - a trusted SAP Concur partner.
Who cares about VAT?
Brexit is a big story. It pretty much dominated our news headlines for the past two premier league seasons. But why should the average tax payer pay any attention to this specific tax when fantasising what life might be like when a Brexit deal is finally agreed?
I’ll tell you why… because it is in the top 3 most important things to consider when considering Brexit!
Number 1 is probably immigration - should we let everyone into our country or should we restrict it based on certain criteria? This is a controversial topic and my opinion thereon is irrelevant.
Number 2 on the Brexit Issue List would then be the ‘Single Market’. I’m not referring to Tinder, but rather the fact that businesses can trade so freely with each other within the EU. The Single Market refers to the EU as one territory without any internal borders or other regulatory obstacles to the free movement of goods and services. A functioning Single Market stimulates competition and trade, improves efficiency, raises quality, and helps cut prices.
In theory, it really is a very cool concept.
The fact is that the EU would not allow a country to leave its special group and still experience the benefit of both free movement (as humans) and free trade (as businesses).
I’ll be honest, the movement of humans and what passports and visas they need is mainly a political debate, but it impacts business as well (which I will touch on later). But whether goods should move in a frictionless manner is vital to the success of not only the British economy, but the European economic zone as well.
And this is why the next most important issue to ponder has to be VAT. Because VAT is probably the single biggest pain point in a world where the UK is not part of the Single Market…
Countries that have a VAT system all charge import VAT. Simply put, import VAT is a tax paid on goods purchased from another country. You can look at it like the entrance fee the importer must pay when she brings goods from abroad into the country. One of the beautiful things about the Single Market is that the EU countries do not impose this entrance fee on each other. Therefore (currently) a UK importer who buys a car from Germany doesn’t have to pay the 20% VAT when it arrives in England.
EU companies (including the UK) do have to pay import VAT when they bring in goods from outside the EU.
As I am sure you have now worked out, this means that in a world where the UK is considered a non-EU country, import VAT will be payable on all goods that come into the UK from the EU (and vice versa). Without getting too technical, whilst this import tax is recoverable by the importer, it causes a significant strain on cash flow and will be a significant barrier to free movement of goods between the UK and the EU.
Claiming VAT from Europe (and vice versa)
As alluded to above, when businesses pay VAT it is generally recoverable. This is probably a familiar concept if you are paying VAT in your own country, but what many don’t realise is that the EU has implemented legislation that gives all companies (EU and non-EU) a mechanism to recover VAT they have paid anywhere in the EU.
For example, if UK employees travel to Germany and incur travel costs (which are efficiently managed and processed using SAP Concur’s superb tech, the VAT on these costs can be claimed back.
The mechanism available to EU companies, however, is significantly simpler than for non-EU businesses. The EU process (which is commonly referred to as the “8th directive”) is paperless, but non-EU companies must submit hard copy documents in order to claim back their VAT.
Therefore, when the Brexit divorce papers are finally signed, UK companies who want to recover VAT from the EU can no longer take advantage of the seamless electronic integration between Concur and VAT IT to claim back this VAT, but will instead have to make use of the cumbersome paper-based approach.
Making Tax Digital
There is a trend across the world for VAT authorities to digitalise VAT. It is a complex concept beyond the scope of this article, but suffice to say it places enormous technical and compliance constraints on how businesses must report their business activity to their tax office.
The UK has implemented their version of this in April 2019, called ‘Making Tax Digital’ (or “MTD”). If you are a UK VAT-registered business and you are not yet familiar with MTD – you are in trouble! I would recommend that you contact your local competent VAT expert immediately. (It just so happens this author works with many of these)
The more your business transacts in foreign countries who also have digital VAT obligations, the greater the chance that you will need to comply with their MTD-equivalent requirements. And if that wasn’t complicated enough, when the UK leaves the EU, the UK VAT return will have to change format (again, it’s too technical to explain why, but trust me this is a certainty). This means that any technological solutions you have put in place to be MTD compliant will probably have to be updated.
Finally, when UK residents can no longer move as freely into EU countries (and vice versa), the VAT obligations businesses have when sending employees abroad could change dramatically as well. Having employees in another country (whether permanently or not) should always be analysed to see if there are tax obligations – but in most cases temporary visits or even secondments don’t result in VAT obligations.
However, in a world where UK employees may need visas to travel to or work in EU countries (again, or vice versa), that situation could change. Visa applications can change the status of an employee in the eyes of the tax office and there will be increased risks that seconded employees may give rise to what is known in the wonderful world of VAT as Fixed Established. (Don’t be fooled by the name, this can often break businesses!)
As I hope this piece has made clear – as a business you have to be thinking about VAT and how the changing landscape of the world (with Brexit and MTD and all that jazz) might create significant constraints on your ability to grow and expand.
But it’s not too late…