Regardless of whether the UK and the EU agree to the terms of a trade deal, the UK will leave the EU VAT area on 31 December 2020. This has the potential to create real difficulties for Irish companies in terms of VAT cash flow and increased administration by operating within the EU VAT area and the UK VAT area from 1 January 2021 onwards.
Trade with the UK
From 1 January 2021, sales of goods from Ireland to the UK should be treated as Irish exports with no Irish VAT chargeable. Similarly, the sale of goods from the UK to Ireland should be treated as UK exports with no VAT chargeable.
Import VAT will arise on the importation of goods into Ireland from the UK. The Irish Government has stated that it will introduce postponed VAT accounting on all imports in the event of a no-deal Brexit. It remains to be confirmed if Ireland will still implement postponed VAT accounting on imports where a trade deal is reached between the EU and the UK. Postponed VAT accounting for imports would avoid the requirement for businesses to pay import VAT at point of import and subsequently recover it, resulting in a significant VAT cash flow benefit for businesses.
A similar position will apply in respect of imports of goods into the UK from Ireland, and UK import VAT will arise at point of import. The UK has announced that is also intends to introduce postponed VAT accounting for imports from EU and non-EU countries into the UK from 1 January 2021.
Furthermore, importing goods followed by a domestic supply may require Irish and UK businesses to obtain UK and Irish VAT registrations to account for VAT on any domestic supplies being made post import (typically DDP supplies). This may result in Irish and UK business operating both an Irish and a UK VAT registration.
It should be noted that the VAT steps outlined above will continue to apply if a trade deal is reached between the EU and the UK.
Trade with NI
Under the agreed Northern Ireland Protocol, NI will remain part of the UK VAT area but the EU VAT rules in respect of goods will continue to apply in Northern Ireland. Therefore, from 1 January 2021, the current VAT treatment should continue to apply to trade in goods between Ireland and NI. This will mean that businesses can continue to treat the supplies of goods to NI as zero-rated intra-EU supplies.
Certain operational aspects of the arrangements will need to be considered further, however; the EU is proposing to amend current law to introduce a special VAT identification for NI businesses. It should also be noted, however, that the UK can adjust VAT rates in NI in respect of goods. Accordingly, the UK, could reduce rates of VAT or even apply VAT exemptions to goods sold in NI. How this would apply in practice remains to be clarified.
Businesses should continue to review their supply chain and understand the potential VAT obligations that may arise from 1 January 2021. This may require businesses to operate within the EU VAT regime and the UK VAT regime. This may also create a significant cashflow (absent postponed VAT accounting measures) and an administrative burden on businesses by way of an additional VAT registration which may give rise to changes in their business model, IT, accounting systems and processes.
Written by Fionn Uibh Eachach, Partner, Indirect Tax at BDO. To watch back our recent Brexit webinar with BDO click here and if you have any questions on this or other Brexit matters contact Elizabeth Bowen, SFA Senior Executive, email@example.com.