Brexit – Ireland/UK Issues to consider for Tech companies
As we move closer to a potential deal between the EU and UK this week, it is probably timely to assess the Brexit related VAT impacts for Tech business operating in Ireland.
Under the Withdrawal Agreement, the UK is in a transition period until 31 December 2020. During this period all Value-Added Tax (VAT) obligations relevant to Irish companies trading with UK based customers and/or suppliers have remained the same across all of the main Irl/UK cross border VAT processes, being:
- VAT Information Exchange System (VIES);
- Mini One-Stop Shop (MOSS);
- Electronic VAT Return (EVR) system etc
After 1 January 2021 (assuming no deal signed pre 1 January 2021)
EU VAT legislation provides for different regimes of VAT for cross-border supplies of services between Member States and with third countries/territories. The place of supply of services depends on various factors, such as the nature of the service, whether or not the person receiving the service is a taxable person, the place where the service is actually provided, etc.
The withdrawal of the UK means that the way the rules will apply for taxable persons established in the UK who supply services in the EU and for taxable persons established in the EU who supply services in the UK will change after the end of the transition period. The VAT Directive determines, via the “place of supply of services” rules, where a service supplied by a taxable person is deemed to take place. After the end of the transition period, where the place of supply of services is situated in a Member State, the supply will be subject to VAT in that Member State. If, on the other hand, the place of supply of services is situated in the UK, the supply will not be subject to EU VAT, but may be subject to UK VAT.
As a rule, B2B supplies of services are situated where the customer has established his business. Under this rule, the supply of services by a UK business to an EU business will be taxable in the Member State where the customer is established, meaning that the customer will be liable for the payment of the VAT due in this Member State (where registered for VAT, this will occur under the reverse charge mechanism as the UK have implemented rules mirroring the old pre-withdrawal VAT regime as regards trading with the EU post 1 January 2021). The supply of services by an EU business to a UK business will be considered as situated outside the EU and therefore not taxable under EU VAT legislation. Therefore, assuming a deal is not done which changes the situation between now at 31/12/2020, Irish Tech Companies should not charge VAT on sales to UK customers B2B (e.g. UK resellers).
Also, as a rule, B2C supplies of services are situated where the supplier has established their business. Under this rule, the supply of services by EU businesses to private individuals in the UK will be taxable in the Member State where the supplier is established. The supply of services by UK businesses to private individuals in the EU will be, in principle, considered as situated outside the UK and therefore not taxable under UK VAT legislation. However, the rules are different where a company supplies Telecommunications, Broadcasting and Electronic Services (“TSE” services), which can often be the case with Irish Tech Companies. The B2C supplies of TSE Services are normally deemed to be situated where the customer is established. If the customer is established in the EU, suppliers not established in the Member State of the customer can make use of a special scheme for declaring and paying the VAT due via the so-called Mini One-Stop-Shop (MOSS). Two types exist: the “Union scheme” for suppliers established in the EU and the “non-Union scheme” for those that are not established in the EU. MOSS allows a taxable person to submit a MOSS VAT return for each calendar quarter and allows for a single payment to the Member State of identification. That Member State of identification splits the MOSS VAT return by Member State of consumption and forwards the details and the corresponding payments to the various Member States of consumption.
Union Schemes and MOSS
After the transition period, suppliers established in the UK and identified in the UK “Union scheme” and suppliers established in a third country/territory and identified in the UK “non-Union scheme” who will continue supplying TSE services to customers in the EU will have to switch to and make use of the “non-Union scheme” in one of the Member States. Suppliers established in the UK and identified in the UK “Union scheme” who are also established in a Member State should move their identification for the “Union scheme” from the UK to this Member State with effect from the end of the transition period. Suppliers established in the EU identified in one of the Member States’ “Union scheme” and suppliers established in a third country/territory identified in one of the Member States’ “non-Union scheme” who will continue supplying TSE services to customers in the UK after the end of the transition period, will not be able to use the MOSS to report and pay any VAT that could be due in the UK. They will have to comply with the rules applicable in the UK (meaning registering for VAT in the UK where supplies of services B2C into the UK exceed the relevant VAT registration threshold).
However, for some services supplied by UK businesses to private individuals in the EU, the VAT will be due in the EU and will be payable by the UK businesses. Where a UK business is liable for the payment of the VAT due in a Member State, that Member State is permitted to require the designation of a tax representative if the taxable person supplying the services is established in a third country that does not provide administrative cooperation and recovery assistance for VAT. After the end of the transition period, this requirement may apply to taxable persons established in the UK.
Therefore, depending on what might be agreed between the EU and the UK between now and 31 December 2020, from 1 January 2021, as regards an Irish company trading with a UK supplier or customer (excluding trade in goods with Northern Ireland – see next sentence), the UK effectively becomes a non-EU member and the rules of trade with a non-EU country will apply. Northern Ireland (NI) will continue to be treated as a Member State with regard to VAT on goods, but will not be treated as a Member State with regard to VAT on services.
As Irish Tech Companies generally provide supplies of software, which are deemed supplies of services from an EU VAT perspective, any such supplies to customers based in the UK after 1 January 2021 will effectively mean that all supplies by Irish Tech Companies to UK or NI based customers will be treated as non-EU supplies of services.
From the perspective of UK companies supplying services to Irish Tech Companies, the UK proposes to adopt an identical system of VAT to the present the European Union system upon Brexit.
Summary of Practical Implications
In summary, from a practical perspective, this means:
- Supplies and movement of taxable goods between Ireland and the Great Britain (GB) will be subject to the Value-Added Tax (VAT) rules on imports and exports. Irish Tech Companies generally do not supply goods so this should not be at issue to any material degree;
- Agreed EU simplifications, such as triangulation, will no longer apply to transactions involving Great Britain (GB). Again, these are not likely to be materially impactful to Irish Tech Companies;
- Irish Tech Companies will no longer have to report details of trade with the UK (excluding Northern Ireland) on the VAT Information Exchange System (VIES);
- Irish Tech Companies would still have to report details of trade with Northern Ireland on the VAT Information Exchange System (VIES), however this will only be practically relevant to Irish Tech Companies selling software to NI based customers;
- Irish Tech Companies should not charge VAT (and should not need to place Reverse Charge wording) on invoices to UK B2B customers;
- The Mini One-Stop-Shop (MOSS) system will no longer apply to sales to UK B2C customers. Therefore, Irish Tech Companies may need to register for VAT in the UK in respect of such sales. The current UK tax registration threshold is £85,000.