Digital businesses crave certainty. They need it to understand the risks on the horizon and to plan ahead accordingly. Brexit – the United Kingdom’s withdrawal from the European Union (EU) – has, unfortunately, produced a catalog of uncertainties that are weighing heavily on digital businesses that trade in the UK.
While the UK officially left the EU at the start of 2020, a transition period came into effect from February 1 until December 31, 2020. The aim of this transition period was to pave the way for a partnership to be agreed between the UK and the EU, this has still not happened. During the transition period EU law still applies in its entirety in the UK. On January 1, 2021, however, businesses that either buy and/or sell goods as well as those that supply and/or receive services in the UK will be affected.
Here we raise some of the outstanding questions that digital service suppliers (including Taxamo) have. We are sure there may be other questions but these are the highlights:
1. What will the VAT registration system resemble on January 1, 2021, when the transition period ends?
Right now, we do not know. In theory at least, foreign digital service suppliers will not be able to declare their UK sales in their MOSS return.
They will expect – and based on international best practice they should expect – a simplified registration process that can be wholly completed online. Such a registration portal would need to be announced as soon as possible and available at a minimum of 6 weeks in advance of the implementation date (so from mid-November). To simplify registration it is also important that the information required is minimal and can be uploaded electronically.
In the absence of such simplification, we know that existing VAT registrations with the UK authorities for foreign suppliers can take a minimum of two weeks and generally 4 to 6 weeks. It is also recommended to make an application in paper format. They also need to include proof of their UK business, or intention to trade in the UK, and the ID of the authorised signatory. This is not something that simplifies doing business in the UK.
2. What B2B validation system will be used to validate VAT numbers?
Right now, we do not know. Foreign digital service suppliers should not be able to use the EU VAT Information Exchange System (VIES) for checking the validity of UK VAT numbers provided by customers after January 1, 2021.
Such suppliers will expect an equivalent system to be introduced or clear guidelines on B2B validation. As of late September 2020 while such a system is expected, it is not yet available.
This leaves digital businesses in a difficult position as they need to implement and test the new solution to allow real-time checkout without disturbing their customer’s journey. They will also have to take decisions on practical approaches if the solution involves CAPTCHA or if the validation system suffers some down time, for example the EU’s VIES system has been known to not work at certain times leading to disturbances of the customer journey.
Practical approaches if no system is available
Businesses may need to prepare to take a more practical approach if the UK VAT number validation system is not ready in time. Looking at the approaches in countries with no validation systems in place can provide some guidelines.
In the scenario of a lack of implementation time, or having no database available, one such approach could be to put the onus of validation on the customer. It means requesting a foreign digital business to save the VAT number with a confirmation of self-accounting for VAT without a further check. This is, for example, implemented in Singapore.
In Singapore, the Inland Revenue Authority of Singapore (IRAS) provides clear guidance (page 27, section 9) for businesses in relation to the use of VAT (or GST in Singapore) numbers. Overseas sellers can rely on the GST number provided by their Singaporean business customers to regard the transaction as B2B and apply the reverse charge. It is the business customer’s obligation to discharge the tax.
Other practical approaches include introducing a tolerance of always charging VAT while allowing customers to recover it. This has the advantage of bringing certainty and simplicity for digital businesses selling mixed B2B and B2C services. This is accepted, for example, in Saudi Arabia and Bahrain.
3. What will happen if I cannot get VAT registered before January 1, 2021?
The official advice from HMRC is that you cannot charge, or show, VAT on your invoices until you get your VAT number. However, you will still have to pay the VAT to HMRC for the period that you are waiting for your VAT number.
What this effectively means, and is outlined in the current HMRC guidance, is that HMRC is suggesting that you should increase your prices (from January 1, 2021) to allow for this potential situation and inform your customers why you are doing so. Only when you have received your VAT number can you then reissue the relevant invoices showing the VAT applied. This will of course lead to an increase in customer support queries, something that also needs to be taken into account when preparing for Brexit.
To conclude, there are still some substantial open questions that create uncertainty and may affect the customer journey. Foreign digital service providers may have to implement changes with little notice that can affect their checkout processes and the relationship with their customers.
PLEASE REMEMBER THAT THIS INFORMATION HAS BEEN PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND IS NOT PRESENTED AS SPECIFIC TAX OR LEGAL ADVICE. ALWAYS CONSULT A QUALIFIED TAX OR LEGAL ADVISOR BEFORE TAKING ANY ACTION BASED ON THIS INFORMATION. VERTEX INC. ACCEPTS NO LIABILITY FOR ANY LOSS RESULTING FROM ANY PERSON ACTING OR REFRAINING FROM ACTION AS A RESULT OF THIS INFORMATION.