In light of the ending of the Brexit transition period as of upcoming 31 December, more companies are considering a move to Europe mainland. With the outcome of the negotiations now clear and a Brexit deal concluded, it makes sense that businesses prepare themselves.
A the trade agreement is concluded between the UK and the member states of the European Union. However, the new reality holds various trade barriers. Although import levies will in principle not be applied, the trade agreement does not prevent adjusted border controls and extra administrative work at the border. This may obviously affect the business of UK companies supplying goods and providing services to businesses and customers in the European Union and vice versa. In this publication we will discuss the consequences for VAT-registered businesses after the Brexit transition period and how any adverse consequences may be mitigated.
- B2B services
From the Netherlands to the United Kingdom
The general VAT rule related to services will apply to services provided by a Dutch VAT-registered business to a UK VAT-registered business. This means that these services will be taxed in the United Kingdom assuming there is no permanent establishment in the Netherlands. The UK will be considered a third country. The service provider does not include any VAT on the invoice and will state “VAT Out of Scope”. This position will therefore be unaffected by Brexit.
From the United Kingdom to the Netherlands
The services provided by a UK VAT-registered business to a Dutch VAT-registered business in the Netherlands will be taxed in the Netherlands and entered under question 4a of the Dutch VAT return, unless an exception applies to the service in question. The VAT can be deducted on the same return under question 5b as input tax.
Accordingly, the VAT is reverse charged to the Dutch VAT-registered business. The UK VAT-registered business may issue an invoice without VAT and state ‘VAT reverse-charged’ on the invoice. Again, the position is unchanged by Brexit.
- B2B supply of goods
From the Netherlands to the United Kingdom
A supply of goods by a Dutch VAT-registered business to a customer – either business or not – in the United Kingdom will be regarded as an export. The VAT related to this export supply will be zero rated. The supplier has to submit an export declaration to the Dutch customs authorities and the turnover will be entered under question 3a of the Dutch VAT return. The Dutch supplier should have a properly administration to substantiate the zero percent VAT rate.
In addition, an import declaration will also have to be submitted in the United Kingdom. The question is whether Dutch VAT-registered businesses want to bother their customers in the United Kingdom with import formalities. To circumvent this it may be considered by the Dutch VAT-registered business to take care of these formalities themselves. This includes applying for a UK VAT number, pay import VAT and charge UK VAT.
From The United Kingdom to the Netherlands
A Dutch VAT-registered business that purchases goods from the United Kingdom and imports them will have to submit an import declaration to the Dutch customs authorities, pay import duties and VAT on the import to the customs authorities and then claim back this VAT on its Dutch VAT return under question 5b, unless it holds an article 23 license.
A VAT-registered business that applies for an article 23 permit can enter the VAT owed on imported goods on its Dutch VAT return under question 4a instead of having to pay the VAT immediately at the time of import. The import VAT can be claimed back under question 5b of the Dutch VAT return. It is possible to apply for the article 23 permit if the relevant requirements are met:
- The VAT-registered entrepreneur lives in, or the business is established in, the Netherlands
- The VAT-registered business regularly imports goods from non-EU countries
- The VAT-registered business keeps separate records indicating how much import VAT is owed
- The VAT-registered business files a VAT return on a monthly or quarterly basis
In order for a UK business to avoid having to comply with all import regulations of each member state it may consider setting up a European Union hub; for instance in the Netherlands. In that the case the hub functions as a further entry into the European market whereby the UK business only has to deal with customs regulations once. Between member states of the European Union there are no import and/or export regulations within the single market approach.
- B2C supply of services and goods
Based on the general rule, a service provided by a Dutch VAT-registered business to a consumer in the United Kingdom is taxed in the Netherlands. The Dutch VAT-registered business will have to charge 21% or 9% VAT and enter this under section 1a or 1b of its Dutch VAT return.
Sales of goods by a Dutch VAT-registered business to consumers will be regarded as exports and no VAT will be owed in the Netherlands. The Dutch VAT-registered business will enter this under section 3a of its Dutch VAT return.
What to do?
As we have seen the Brexit will impact on VAT and customs requirements for UK businesses doing business in the European Union. In order to mitigate the administrative burden following from the Brexit, it may be consider to setting up a hub in the European Union. Hundreds of UK companies are already working on opening a branch in the Netherlands in the upcoming months in light of the ending of the Brexit transition period.
An office or branch in the European Union will keep the European market accessible, and the Netherlands is a popular choice for that office for different reasons. Please note that certain substance requirements apply to legal entities in the Netherlands for these entities to be considered Dutch tax residents. In short it comes down to the composition of the board (i.e. Dutch resident board members) and the nature of the active operating activities in the Netherlands.
If you want to know more on what impact the Brexit could have for your business from a tax perspective and if an office in the Netherlands could mitigate any risks associated therewith, please contact one of our specialists below.