HMRC VAT no-deal Brexit planning

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        <h3>Update</h3>
        <h4>The VAT (Finance) (EU Exit) Order 2019 has been revoked by the VAT (Finance) (EU Exit) (Revocation) Order 2019 (SI 2019/1014). The Government has decided to introduce the equivalent changes with effect from a fixed date in order to provide certainty about the timing of the change. That date is expected to be 01 April 2020. A replacement SI to bring in the changes to the VAT treatment of pension fund management will be laid in due course.</h4>
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HMRC has released a number of SIs to take effect in the event of a no-deal Brexit and provide for the continuing operation of the VAT system. These include important provisions dealing with deferred accounting for import VAT for VAT registered traders and changes to the UK finance exemptions to align the UK legislation with recent CJEU decisions.

Background

The new SIs which cover a number of different areas include the following:

• VAT (Finance) (EU Exit) Order 2019 (the Finance Order)
• VAT (Accounting Procedures for Import VAT for VAT Registered Persons and Amendment) (EU Exit) Order 2019 (the Accounting Order)
• VAT (Tour Operators) (Amendment) (EU Exit) Order 2019 (the TOMS Order)
• VAT (Miscellaneous Amendments and Revocations) (EU Exit) Order 2019 (the Miscellaneous Order)
• VAT (Input Tax) (Specified Supplies) (EU Exit) Regulations 2019 (the Specified Supplies Regulations)

These add to the draft no-deal Brexit customs related SIs previously released by HMRC in November 2018.

Finance

The Finance Order provides for an extension to the exemption for the management of SIFs in VATA 1994 Sch 9 Group 5 Item 9 which is designed to implement the decision of the CJEU in ATP PensionService (Case C 464/12) on the scope of the exemption but which has not been explicitly provided for in domestic UK legislation as yet.

Under the Finance Order, the exemption for the management of SIFs will be extended to the management of “a recognised pension fund”. A recognised pension fund is defined as a pension fund which is solely funded (directly or indirectly) by its members, which pools the investments of more than one pension member, in which the members bear the investment risk and where that risk is spread over a range of investments. It should be noted that the definition requires the pension fund itself to spread the investment risk and the exemption would not apply if the pension fund invested in another fund which itself spread the risk over a range of investments. In addition, the definition extends to non-UK as well as UK pension funds, which means that care will need to be taken by managers providing their services to foreign pension funds or arrangements to classify the recipient of their services correctly, given the potential impact on the manager’s input VAT recovery position.

In addition, the Finance Order will remove the requirement in Note 6 of Group 5 for a “closed ended collective investment undertaking” (the management of which is exempted under VATA 1994 Schedule 9 Group 5 Item 10) to invest “wholly or mainly in securities”. Again, this is intended to align domestic VAT law with the comments of the CJEU in Fiscale Eenheid X (Case C-595/13) that the exemption for the management of a SIF can, in principle, extend to a property fund. Externally managed REITs, and their managers, will in particular need to consider the potential impact of this change. However, the remaining requirements of this definition are not amended, meaning that it will only extend to relevant funds listed on the FCA’s Official List and admitted to trading on a UK regulated market.

Deferred accounting

As the Government has previously made clear in its no-deal Brexit guidance, it will introduce postponed accounting for import VAT on goods brought into the UK, whether from the EU or elsewhere in recognition of the fact that dealing with import VAT from EU imports will create an additional cash-flow impact and administrative burden. The Accounting Order makes provision for this scheme of import VAT deferral by providing that a VAT registered importer may account for import VAT on their VAT return for the relevant VAT accounting period provided that the import declaration contains the importer’s VAT registration number. This means that UK VAT registered businesses importing goods to the UK would be able to account for import VAT on their VAT return, rather than paying import VAT on or soon after the time that the goods arrive at the UK border. This change will apply not just to imports from the EU but to all imports.

It should be noted that the Accounting Order does, however, contain the power for HMRC to withdraw the right of a VAT registered trader to use the deferred import VAT accounting provisions if they consider it is necessary to do so for the protection of the revenue.

TOMS

The Tour Operators Margin Scheme (TOMS) is a VAT simplification measure for businesses that buy in and resupply travel and travel-related services. Under TOMS, rather than accounting for output VAT on the full value of the supply made, a business must account for VAT on the profit margin of the relevant supplies. However, the supplier then cannot reclaim as input tax any VAT incurred on the travel services bought-in and resupplied.

The TOMS Order will restrict TOMS post-Brexit to supplies of travel and travel-related services supplied by a tour operator with a business or fixed establishment in the UK. Supplies of “designated travel services” will be treated as supplied in the UK regardless of the place of enjoyment under these rules. These changes are essentially designed to put in place of UK version of the TOMS post-Brexit for UK tour operators to use.

In addition, the TOMS Order provides that the current zero-rating provision in VATA 1994 Sch 8 Group 8 Item 12 for designated travel services outside the EU will be extended to any such supply outside the UK. This will mean that the margin on any supplies within the UK TOMS scheme to persons which are to be enjoyed outside the UK will be zero-rated.

Specified Supplies

The Specified Supplies Regulations are designed to ensure that these provisions, under which taxpayers can benefit from input VAT recovery in relation to certain exempt supplies (such as insurance and finance related supplies) where they are made to non-EU customers, continue to operate as at present. In particular, they ensure that supplies made within the UK (which will no longer be within the EU) do not unintentionally benefit from input VAT recovery.

However, whilst these Regulations maintain the status quo, they will not extend input VAT recovery to supplies to EU customers. The Government has indicated that this is an area that is being kept under review. Clearly it is concerned by the potential revenue cost of this extension but it is understood that ministers are yet to make a decision on this issue.

Miscellaneous

The Miscellaneous Order will make a number of other changes to the UK VAT and excise duty rules in the event of a no-deal Brexit. Many of these changes are merely consequential on the withdrawal of the UK from the EU, including revocation of legislation referring to “acquisition VAT” and “community transport”, for example. Other changes are to treat Member States in the same way as third countries. One consequence will be to require all non-UK-established businesses seeking to recover VAT charged in the UK to use the cumbersome Thirteenth Directive mechanism post-Brexit (including in relation to VAT incurred before Brexit).