VATMOSS, cross-border taxation, and Brexit

Last updated 19 October 2020

What is happening with VATMOSS and Brexit?

UK retailers will be required to continue collecting and remitting VAT on European cross-border transactions after Brexit. To not do so would be to engage in tax evasion. The planned reforms to the MOSS system achieved by the EU VAT Action campaign, including a low earnings threshold and simplified reporting requirements, are contingent on the UK being a part of the EU. Post-Brexit UK retailers therefore face compliance requirements from a system which they no longer have a say in.

Relevant policies:

The VATMOSS and Brexit issues discussed here are part of the Digital Single Market strategy.

Progress and developments:
In January 2017 the European Scrutiny Committee of the House of Commons reviewed Government progress on implementing the proposed changes, especially where VATMOSS and Brexit are concerned. Their response here is unlike anything else in the full March 2017 scrutiny report.

The Committee notes that “these proposals were foreshadowed in the Commission’s VAT Action Plan “Towards a single EU VAT area—Time to decide”. We recommended that this document should be debated in European Committee B early last year. With a complete disregard for the scrutiny processes of the House the Government has failed to yet schedule this debate on major changes to the VAT system. There will have to be a post Brexit VAT regime in the UK; the extent to which it might match the EU regime remains an important question.

As long ago as April 2016 we recommended that [the proposed reforms] be debated in European Committee B. But disgracefully the Government has yet to schedule this debate.”

These comments are both a testament to the work of the EU VAT Action campaign and a damning indictment of a Government using Brexit as an excuse to ignore ongoing legislative matters which happen to involve the European Union.

The Commitee has requested further clarification from Government on “how much of these proposals would it wish to import into the UK’s post-Brexit VAT regime and about what form of “fiscal frontier” there might be between the EU’s VAT regime and that of the UK.”. They have asked for a response from Government by 9 May.

The bombshells continue. The 22 November meeting of the Committee, which responded to Goverment’s stated intentions for the 7 December ECOFIN meeting, noted that “We were in any event somewhat surprised by the Government’s support for the legal texts, given that it does not appear that the concerns it has raised consistently since the proposals were tabled last year have been addressed. “

This is a diplomatic way of saying that Government is so overwhelmed by Brexit it is no longer doing its job.

Despite the success of the 7 December ECOFIN meeting, in which the proposed VATMOSS reforms were approved, the European Scrutiny Committee is remaining focused on the larger picture. Their 24 January 2018 meeting noted, somewhat astonishingly, that the fundamental issues about the UK’s future within the MOSS system after Brexit do not just remain unanswered: the questions themselves have not been asked.

The European Memoranda on the MOSS reforms are worth studying in depth.

Also on the subject of VAT, in December 2017 the European Scrutiny Committee looked at the implications of the single European VAT area on, amongst other things, the Irish border. In December the Committee also touched on the Communication on a Fair and Efficient Tax System in the European Union for the Digital Single Market, asking Government to clarify “what ways will leaving the European Union affect the UK’s ability to tackle the challenges the digital economy presents in terms of corporate taxation? Will it be easier for the Government, outside the EU, to oblige digital businesses that currently route economic activity through other Single Market tax jurisdictions (e.g. Ireland) to have a permanent establishment in the UK and to pay larger corporate tax contributions, or does the EU’s limited competence in this policy area mean that the impact of a shift to third-country status will be limited?”

In April 2018 the ESC published a report reiterating its requests for Government to clarify its post-Brexit intentions on VAT:

The report included concerns about the surival of the proposed small business exemptions for VATMOSS.

In September 2018 the ESC published an extremely detailed review of the state of play between EU VAT reform, including VATMOSS and Brexit. The Committee, as they so often do, used the opportunity to call Government’s bluff on its lack of preparations by stating “If the Minister cannot provide further information on the substance of the ‘common processes and procedures’ in particular, we expect his letter to explain in detail why this is the case. It cannot be to retain a negotiating advantage over the EU, given that by definition the UK needs to be clear about its desired outcome on VAT cooperation if it wants to stand a chance of negotiating that outcome successfully.”

The September 2018 report included a useful table of the progress of specific pieces of VAT legislation.

In December 2018 the ESC caused rare headlines by pointing out that we have several months ahead of us where the VAT threshold for UK businesses may be lowered, then may be raised again, or might not be. The uncertainty over what happens next is completely government’s fault, and lies in the two and a half years of failures documented above.

In January 2019 the ESC reviewed the VATMOSS and Brexit issue from the perspective of the imminent withdrawal, setting forth what is likely to happen in the event of a managed transition as well as a “no deal” scenario.

If you are impacted by the issue I highly recommend you read the full report, but the main takeaways are:

7.09 If the draft Withdrawal Agreement is eventually ratified despite Parliament’s initial vote to reject it, EU law—including VAT legislation—will continue to apply in the UK until at least December 2020 and potentially until the end of 2022. During this transition period, UK businesses will retain access to the current Mini One Stop Shop (as well as its expanded version as and when it becomes operational) by virtue of their UK VAT registration. The Government would be required to transpose changes to the VAT Directive into domestic law, even if those changes were agreed at EU-level after the UK ceases to have the veto over new European tax legislation (which it currently has as a Member State).

7.10 After the end of the transition, British businesses would cease to be able to use the distance-selling threshold to pay VAT domestically on sales to the EU (although this threshold is any event being reduced to €10,000 of sales by January 2021). In addition, British VAT registered-businesses would automatically cease to be eligible for access to the OSS unless a new legal agreement to that effect had been concluded with the EU. We note in this respect that no non-EU country has direct access to the One Stop Shop at the moment: ‘third country’ companies have to register for VAT in a Member State (the ‘non-Union scheme’) and access the One Stop Shop that way. That will also by default be the only option for British businesses wanting to sell to EU consumers and account for VAT via the OSS. However, non-EU firms’ usage of the OSS for sales into the EU will be limited to VAT goods worth €150 or less, or electronically-supplied services. The full One Stop Shop accounting simplification mechanism will be available only to EU-based businesses.

7.11 The UK’s departure from the One Stop Shop system would also affect a large number of non-EU businesses. The European Commission has noted that the UK had been by far the largest amount of OSS users from outside the EU (616, followed by Ireland at 166), representing 60 per cent of all users of the ‘non-Union scheme’ and 50 per cent of all VAT revenue collected via the MOSS from third country suppliers of electronic services. To continue using the system they will need to move their VAT registration to one of the remaining Member States, and we expect many of them have already done so in anticipation of the UK’s scheduled withdrawal from the EU in March.

7.15 If the Withdrawal Agreement is not ratified, the UK’s change from ‘Member State’ to ‘third country’ vis-à-vis the EU occurs automatically on 30 March 2019. That means the impacts described above—lack of UK access to the One Stop Shop and HMRC’s removal from the EU’s centralised tax and customs databases—would then happen overnight, without the benefit of the transitional period foreseen in the Withdrawal Agreement. There would also be no agreed mechanism to resolve any VAT-related issues for cross-border sales that took place before ‘exit day’, where the Agreement does explicitly cater for such situations.

In March 2019 Government published what I will generously abbreviate as the VATMOSS SI, removing the UK from the changes to the MOSS system which took effect on 1 January.

For those who do continue to trade within Europe, the final one-stop-shop reforms have been pushed back six months from 1 January 2021 to 1 July 2021, due to covid. The UK fully supports this position.

Also, William Shatner has apparently discovered all of this the hard way.

Fair Taxation of the Digital Economy

Outside the narrow field of VATMOSS but in the wider field of cross-border taxation, in June 2018 the ESC reviewed the EC’s package on Fair Taxation of the Digital Economy. In response, the Committee asked the Minister (Mel Stride MP) for the following clarifications:

  • “What proportion of the estimated additional €5bn in annual tax receipts generated by the proposed levy does the Government believe would accrue to the UK?
  • When the UK leaves the EU Single market, if it chooses to unilaterally impose an equivalent levy at the same rate, how would the yield differ? Given that the current proposal would entail some transfer of levy revenues from countries such as Ireland, to countries with large numbers of users, is it reasonable to assume that the yield would be reduced?
  • If draft Directive 7419/18 were adopted and the US were unwilling to amend its double tax treaties with EU Member States, what would be the overall effect of the measure in terms of tax receipts from US digital businesses to which the EU measure would apply? Please provide an explanation of the Government’s reasoning, on this point.

Regarding EU exit, we ask the Government:

  • whether the agreement of Directive 7420/18 would be advantageous to the UK after it has left the EU (and any implementation period has ended), by raising overall levels of digital taxation within the Single Market;
  • whether the UK’s intention to leave the EU’s Digital Single Market, announced in the Prime Minister’s Mansion House speech, could negatively impact the ability of the UK to attract large digital businesses to establish taxable business presences in the UK, given the importance of scale markets to the digital economy; (emphasis mine)
  • And whether, as part of the “level-playing field” pillar of the future economic partnership, the Government would be willing to accept any constraints at all on its taxation policies? Please describe which types of constraint would be acceptable within the context of the partnership, and which would not.”

In December 2018 the ESC returned to the Fair Taxation package, telling the Financial Secretary to the Treasury to go back and finish his homework with all the questions he forgot to answer.

In March 2019 the ESC got a bit dramatic about it, and in July they got a bit snippy about it.