Many tax rules and regulations between the UK and EU will undergo drastic changes or will no longer be applicable when the UK leaves the EU VAT regime and Customs Union on 31st December 2020. What this implies is that the trade between the UK and EU countries will no longer be considered as intra-community transactions but will now have import/export implications. For example, if a UK based company exports automobiles to Germany, then it will have to pay import VAT in Germany and also will no longer be able to recover it. Many such scenarios will start emerging post 31st December 2020 and to overcome these without any major hiccups businesses will have to consider VAT outsourcing.

What Activates Foreign VAT in Accounts Payable?

When goods are imported into the UK from the EU or vice versa, VAT will become payable as there would be an absence of import deferment scheme post Brexit (which normally exempts businesses from paying the import VAT). However, in AP, foreign VAT will be applicable for events, centrally billed travel agencies, fuel (cards) for company cars and trucks, etc. These changes will also apply to a non-EU country (for example, US businesses) that have one common import point in the UK or one of the EU countries or distribute goods between the UK and the EU mainland.

Intricacies involved in the Recovery of Foreign VAT in Accounts Payable

As such, businesses normally recover some or all of the foreign VAT incurred and in the process can reduce their tax burden. However, post-Brexit, there will be different procedural requirements to recover the foreign VAT incurred. Businesses will have to account for purchases by recording VAT compliant invoices and imports by import documentation. Also, there will be greater scrutiny from the tax authorities regarding certain transactions and hence an expert review will be required before submission of VAT.

It will not be easy to identify the eligible foreign VAT AP transactions. Even the most experienced accountants will find it difficult to uncover already-booked invoices from supplies and activities that contain recoverable foreign VAT. Even after identifying it, only the one who is updated and expert in all the rules and regulations will be able to tell whether the VAT was charged correctly and whether it is recoverable.

Post-Brexit, there will be many more intricacies to the already-complex rules and regulations. Very few accountants or VAT department members would be experts in the end-to-end foreign VAT recovery process in so many countries. This may lead to losses due to non-recovery of foreign VAT recovery losses and even potential penalties and fines due to non-compliance. Hence, it will be in the best interest of the businesses to consider outsourced VAT return services of a reputed, professional, and experienced accountancy firm.

To-do for Businesses to Minimize the Impact of Foreign VAT in AP before and after Brexit

1. Review the end-to-end supply chain to pinpoint those areas where foreign VAT will be applicable post-Brexit.
2. Before 1 January 2021 keep your Economic Operators Registration and Identification number ready.
3. Some EU nations may extend import deferment schemes- make use of these to avoid payment of import VAT at the point of importation.
4. For the year 2020, identify any eligible foreign VAT in AP transactions before March 2021.
5. Implement such software and digital systems which will process and automate your Foreign VAT transactional data.

Impending Brexit has motivated many businesses both in the UK and in the EU to take a closer look at the extent of existing foreign VAT in AP recovery processes and how software, systems, and expert advice can provide greater value in realization of that VAT because the hard-earned VAT amount coming back into the company’s account can be re-allocated where it is needed.