Impact assessment

HMRC impact assessment for VAT and services if the UK leaves the EU without a deal

Published 27 March 2019

Section A: Background

Introduction

The government wants a smooth and orderly exit from the EU, with a deal that protects our union, gives us control of our borders, laws and money, and means that we have an independent trade policy. The government is working towards an ambitious and comprehensive future partnership with the EU, delivering a close economic and security relationship that is in the interests of both the UK and the EU.

Delivering the deal negotiated with the EU remains the government’s top priority. Nevertheless, the government is progressing no deal preparations to ensure the country is prepared for every eventuality.

As part of the no deal preparations, HMRC has published technical notices on customs, excise and VAT as well as a collection of guides for businesses – Trading with the EU if the UK leaves without a deal.

This impact assessment covers the impact on businesses of amendments to existing VAT legislation and the introduction of transitional provisions for the supply of services between the UK and the EU. It includes four sections:

• Section A: Background
• Section B: Summary of impacts
• Section C: Detailed impacts
• Section D: Other impacts

The regulations being introduced

The Taxation (Cross-border Trade) Act 2018 (TCTA 2018), which received Royal Assent on 13 September 2018, introduces a number of powers to amend the Value Added Tax Act 1994 (VATA 1994) and to make provisions in relation to VAT in consequence of, or connected with, the UK’s withdrawal from the EU.

These powers are flexible enough to accommodate a range of negotiated outcomes, including a no deal scenario.

Under the TCTA 2018 and the EU Withdrawal Act 2018 (EUWA 2018) the government is introducing regulations (Statutory Instruments (SIs)) before the UK leaves the EU that will amend the existing VAT legislation in the event of a no deal scenario. This impact assessment explains how businesses supplying services will be impacted by the SIs in relation to VAT and services that have been laid between January and March.

In addition to this impact assessment, separate impact assessments have been published for:

• the movement of goods; and
• VAT and parcels.

Impact assessments will also be published for the following SIs if the UK leaves the EU without a deal:

• UK Tariff and related regulations (which will include goods relieved from any UK Tariff); and
• the trade arrangements for movement of goods between Northern Ireland and Ireland for customs, VAT and excise

This impact assessment covers regulations, that can be found here, which amend existing provisions for:

• fund management services
• the VAT Mini One Stop Shop
• the Tour Operators Margin Scheme
• specified supplies of financial services

It also covers the introduction of transitional provisions which will apply to supplies that span exit day.

Before the UK leaves the EU

Under current VAT rules:

• VAT is charged on most goods and services sold within the UK and the EU; and
• the place of supply rules for services determine the country in which a business should charge and account for VAT.

Policy Objective – What happens in a ‘no deal’ scenario?

In the unlikely event that the UK leaves the EU without a deal, the UK will continue to have a VAT system. The government’s aim will be to keep VAT treatment of supplies as close as possible to what they are now to provide certainty and continuity and minimise additional administrative burdens on business. However, changes will be needed to the VAT treatment of transactions between the UK and EU member states to reflect that the UK is no longer part of the EU and the VAT treatment of certain UK domestic transactions will also change to maintain the current treatment afforded by the direct effect of EU law.

Section B: Summary of impacts

The government does not want or expect a no deal scenario, but if the UK leaves the EU without a deal, these regulations will come into effect on exit. This impact assessment explains the impacts of each of the VAT and services SIs laid between January and March 2019. As the SIs broadly maintain the current VAT treatment, HMRC expects that they will have either a negligible impact on the administrative burden on businesses or no impact. The exception is the removal of the VAT Mini One Stop Shop, which may have a significant ongoing cost for some EU and non-EU businesses. The full impacts are set out in Section C below.

The cost of complying with the tax systems of EU member states is outside the scope of this impact assessment.

Rationale and evidence of analysis

Where data is available, HMRC has calculated the administrative burdens using the Standard Cost Model (SCM) as the basis for impacting the ongoing burdens the regulations will place on businesses. This is an established model that uses an internationally recognised framework, based on data collected externally from businesses and a methodology which produces consistently calculated estimates. This information is then combined with other data that is available to HMRC and used to calculate the administrative burdens on business.

Where data is limited HMRC has used internal customer insight and information obtained from engaging with stakeholders to develop its assumptions.

Why publish an overarching impact assessment?

An overarching impact assessment has been published for the movement of goods because the legislation being made is substantial and will be introduced through a sizeable number of regulations over a number of months. HMRC has decided for consistency to present the impacts of the VAT and services legislation in a similar way.

Not all parts of this impact assessment will apply to all businesses, due to differences in the specific activities they undertake.

Section C: Detailed impacts

1. The Value Added Tax (Finance) (EU Exit) Order 2019

This SI amends the VATA 1994 to preserve the existing VAT treatment currently allowed for under EU VAT law by:

• extending VAT exemption for the management of special investment funds (SIFs) to the management of certain pension funds; and
• removing restrictions on the type of assets that a closed-ended collective investment undertaking can invest in for its management to qualify for exemption.

EU VAT law currently provides for a wider VAT exemption for the management of SIFs than UK VAT law. VAT exemption means that no VAT is charged by businesses making the supply and any VAT on the costs relating to those supplies cannot be recovered. HMRC currently allows businesses to choose whether to exempt their fund management services by relying on the direct effect of EU VAT law, or to tax them. This option applies to supplies of fund management services to certain types of pension funds and state regulated property funds.

An informal consultation with trade bodies and their representatives confirmed that the majority of the industry chooses to exempt their supplies. These changes will have no impact on these businesses.

There will be a number of businesses that currently apply VAT to their supplies that will now have to exempt them. These businesses will face some one-off transitional costs, for example performing checks to ensure the exemption is correctly applied to funds that meet the necessary criteria. HMRC will continue to work with affected businesses to minimise the additional administrative burden as much as possible.

As this SI enables the majority of businesses to continue applying their current VAT treatment, the overall administrative burden impact on businesses is expected to be negligible.

2. The Value Added Tax (Miscellaneous Amendments and Revocations) (EU Exit) Regulations 2019

This SI amends or revokes 24 VAT SIs which make a number of necessary, consequential amendments to the Value Added Tax Regulations 1995 (VAT Regulations 1995) and other secondary legislation arising from the changes to the VATA 1994 made by the TCTA 2018 and the EUWA 2018.

In particular, the SI amends the VAT Regulations 1995 to remove provisions in relation to the VAT Mini One Stop Shop (MOSS). The changes to the VAT Regulations 1995 are consequential to the removal of schedules 3B and 3BA to the VATA 1994, which contains the provisions for VAT MOSS, by the TCTA 2018.

VAT MOSS is an online service that allows EU and non-EU businesses to register (using the Union and non-Union schemes, respectively) in a single member state and account for the VAT on supplies of digital services to consumers across the EU through a single return. The EU law that establishes the VAT MOSS service will no longer apply and the UK will not be able to administer the system.

UK and non-EU businesses registered for VAT MOSS in the UK will need to either:

• register for VAT MOSS in an EU member state; or
• register for VAT in each member state where they supply digital services to consumers.

In either case there will be one-off and ongoing costs to comply with the obligations set by the member state. The cost of complying with the tax systems of a member state is outside the scope of this impact assessment.

VAT on supplies to UK consumers will need to be accounted for through a UK VAT registration. There will be no additional administrative burdens on UK businesses as they will continue to declare their supplies of digital services to UK consumers on their UK VAT return.

Non-EU businesses will need register for UK VAT. There will be a negligible one-off cost for VAT registration and a significant ongoing cost associated with submitting UK VAT returns.

EU and non-EU businesses registered for VAT MOSS in an EU member state and which supply digital services to UK consumers will need to register for UK VAT, if not already registered, to account for VAT on those supplies. These businesses will have a negligible one-off cost for VAT registration and a significant ongoing cost associated with submitting UK VAT returns.

The remaining VAT and services amendments within the SI are technical and will have no impact on businesses.

3. The Value Added Tax (Tour Operators) (Amendment) (EU Exit) Regulations 2019

This SI amends the Value Added Tax (Tour Operators) Order 1987 to maintain a UK version of the Tour Operators Margin Scheme (TOMS) for UK tour operators that buy in and sell on travel services, to retain some of the benefits currently afforded by EU TOMS.

TOMS is a mandatory EU wide simplified VAT accounting scheme for tour operators that buy in and sell on travel services such as passenger transport and hotel accommodation. Under TOMS, VAT is accounted for on the margin that is made on travel services that are bought in and sold on, rather than the full selling price and UK or EU VAT charged on those supplies cannot be reclaimed.

The main benefits of TOMS are that:

• UK tour operators account for VAT in the UK on all their travel services supplied across the EU rather than registering for VAT in each individual member state where they make supplies;
• it allows two or more travel services to be treated as a single supply of services rather than multiple supplies which may have different VAT treatments; and
• it treats the place of supply, of that single supply, as the UK irrespective of where the travel service is enjoyed.

This SI maintains a version of TOMS for UK tour operators that buy in and sell on travel services. While it is not possible to retain the benefit of not having to register for VAT in individual member states where supplies are made (this is a matter for the individual EU member states concerned), it keeps the other simplification benefits of EU TOMS. It also ensures consistency with the general rule for VAT that supplies of goods and services are taxed in the country of consumption.

Currently the margin on travel services enjoyed outside the EU is zero-rated and the margin on supplies enjoyed within the EU is taxed at the standard rate. When the UK leaves the EU, the margin on all travel services enjoyed outside the UK will be zero-rated so that services enjoyed in the EU will be treated the same as those enjoyed in the rest of the world. UK tour operators will continue to charge VAT at the standard rate on travel services that are enjoyed in the UK.

The change to UK TOMS requires minimal changes by businesses and will only affect UK tour operators that sell travel services that are enjoyed in EU member states.

The overall administrative burden impact on businesses is expected to be negligible.

4. Taxation (Cross-border Trade) Act 2018 (Value Added Tax Transitional Provisions) (EU Exit) Regulations 2019

This SI ensures there is a consistent set of rules to manage supplies of services that are in progress as the UK leaves the EU, and deals with other transitional issues that arise as a result of the UK leaving the EU.

They provide that:

• supplies of services that span exit day are apportioned on a fair and reasonable basis in line with established rules;
• HMRC has the ability after EU exit to address errors and mis-declarations in relation to supplies made before exit day; and
• taxpayer rights and responsibilities are maintained for transactions occurring before exit day.

The transitional provisions will provide certainty to business. In particular, they ensure that transactions that span exit day are only subject to one set of rules and cannot therefore be subject to double taxation. They also ensure that any legal rights, powers, obligations, liabilities and restrictions that exist before exit day can still be enforced or exercised after exit day in relation to those earlier time periods.

Any impacts in relation to these transitional provisions will be subsumed within the wider impact of the related changes set out in this and the other EU exit impact assessments (The regulations being introduced).

5. The Value Added Tax (Input Tax) (Specified Supplies) (EU Exit) Regulations 2019 and The Value Added Tax (Input Tax) (Specified Supplies) (EU Exit) (No.2) Regulations 2019

The first SI, laid on 5 February, amends the Value Added Tax (Input Tax) (Specified Supplies) Order 1999 (SSO) to ensure that the current VAT treatment for financial services supplied to UK customers is maintained. This SI will not now be commenced.

The second SI, laid on 1 March, amends the SSO to allow VAT on costs relating to supplies of financial services to EU customers to be reclaimed in the same way as costs on supplies to rest of the world customers. The current VAT treatment of supplies to UK customers is unchanged. It also makes consequential amendments to the VAT Regulations 1995 in relation to partial exemption special methods (PESMs).

Financial services are exempt from VAT which means that no VAT is charged by businesses supplying financial services and VAT on the costs incurred in making those supplies cannot be reclaimed.

The SSO allows businesses to reclaim the VAT incurred on costs related to certain financial services (specified supplies) supplied to, or provided in connection with, exports of goods to customers belonging outside the EU. This treatment is often referred to as exemption with refund, or an effective zero-rate.

This will bring the VAT treatment of specified supplies to EU customers into line with the treatment of specified supplies made to rest of the world customers. This will ensure that UK will be able to compete in the EU market on an even footing with businesses in other non-EU countries.

The VAT liabilities of the UK businesses making specified supplies to EU customers will be significantly reduced by the application of the effective zero-rate to those supplies. As the SI maintains the current VAT treatment for supplies to UK customers and extends the rest of the world treatment to EU customers, HMRC expect any administrative burden impact on businesses to be negligible.

Businesses that make exempt supplies and taxable supplies (supplies on which VAT is charged and VAT on cost can be reclaimed) must carry out a calculation to identify how much of the VAT incurred can be reclaimed. Businesses can apply for approval to use a PESM if the standard method calculation is not suitable.

This SI amends the VAT Regulations 1995 to ensure the wording of an existing PESM must be read as meaning that VAT in relation to financial services supplied to UK customers cannot be reclaimed (current VAT treatment) and VAT for supplies of financial services to EU customers can be reclaimed, in the same way as VAT on supplies of financial services to rest of the world customers.

As businesses will not need to apply for a new PESM there will be no impact on businesses.

Section D: Other impacts

Exchequer impact

In the event of a no deal scenario, final costing would be produced and would be subject to scrutiny by the Office for Budget Responsibility and would be set out at a later date.

Economic impact

This impact assessment covers HMRC’s best assessment of the direct costs and administrative burdens to businesses from changes to VAT on services in a no deal scenario. It is not an assessment of the macroeconomic impact of these changes.

The government has fulfilled its commitment to provide economic analysis of different EU exit scenarios to parliament and published its Long-term Economic Analysis (Command Paper) on 28 November 2018.

The published analysis is not a forecast of the UK economy but sets out the economic impact of changes to the UK’s trading relationships under different EU exit scenarios against current arrangements. The analysis includes a no deal scenario which captures the full economic effect of this outcome, including implicitly, the costs and frictions from changes to the customs arrangements. The government’s analysis looks at long-term economic impacts and does not capture short-term operational or wider economic effects.

Equalities impact

Equality impacts have been considered across all of these regulations and HMRC does not anticipate that there will be impacts on groups sharing protected characteristics.

Declaration

The Right Honourable Mel Stride MP, Financial Secretary to the Treasury, has read this impact assessment and is satisfied that, given the available evidence, it represents a reasonable view of the likely costs, benefits and impacts