Indirect taxes and establishment – a previously minor detail creating big problems with Brexit?

As a result of Brexit many businesses are now looking at their VAT registration positions across the EU. It is becoming clear that the ‘common system’ of VAT has not been applied in an altogether common manner. One area that needs careful consideration is the concept of ‘establishment’ – but what certainty can businesses rely on in this area and what happens when they get this wrong? 

What has changed?

The concept of establishment is significant in the VAT world. It defines amongst others:

  • the place from where a business may supply or receive a supply of services;
  • the rights and rules which must be observed for both VAT and Customs Duty;
  • the nature of a VAT registration; and
  • the steps which may be required to submit returns.

However, as a member of the EU, UK businesses have not historically placed a heavy significance on the concept.

As many businesses are now realising, the approach and rules relating to the concept of establishment are not consistent across the EU and they are now faced with understanding vastly different rules driven by the concepts of establishment, VAT registrations and the place of supply. 

In addition to this, courts across the EU are increasingly looking at the requirements of businesses when it comes to identifying the relevant places of establishment. Some recent cases such as Dong Yang illustrate that some tax authorities are still inconsistently applying the concept. 

With the end of the Brexit transitional period fast approaching, with the result that UK businesses will be considered to be established outside the EU from 1 January 2021, businesses need to understand the different requirements in the EU countries in which they operate and specifically, how the rules that affect them will change. 

What does this mean to businesses? 

Businesses need to ensure that they are aware of what constitutes an establishment in each EU country in which they operate, together with the consequences of holding an established VAT registration or a non-established VAT registration in those countries. 

There are a number of areas which will be affected by a business being established in the EU, ranging from VAT registration and compliance obligations, to more complex VAT rules such as:

  • applying the reverse charge;
  • the application of domestic reverse charge mechanisms;
  • the application of specific “use and enjoyment” rules; and
  • needing to utilise a special scheme (eg a 'One Stop Shop') in order to correctly account for VAT. 

Failures to adhere to VAT compliance rules can result in penalties and interest being levied at different rates across the EU. 

Not only this, but in certain countries an established VAT registration may require branch accounting, in others possibly entity accounting. 

In addition to the inconsistencies around VAT accounting and compliance (some of which are specified above), the majority of EU Countries will require non-established businesses to have a fiscal representative in order to be VAT registered or to obtain VAT refunds after 1 January 2021. 

It can be a complicated and expensive process to engage a fiscal representative, and we are finding that a number of businesses are not including this time and cost as part of their Brexit planning. 

How can RSM help?

It is clear that this is a highly complex area and failing to understand obligations arising from the various definitions of establishment across the EU can create serious consequences. 

To ensure that businesses understand where they are established, or whether an establishment exists in another EU country and indeed what implications this may have, we can provide local advice and support to ensure that all registration and compliance obligations are met.

In light of Brexit, supply chains will need careful analysis. We can provide assistance with navigating the various local rules across the EU and to ensure that establishments are created only in the desired locations.

Most importantly, by seeking early assistance with understanding where a business is established, and the associated VAT and customs requirements in those countries, we are able to ensure that business can continue ‘as usual’ from 1 January.

Summary

The area of establishment is complex and requires businesses to have a detailed understanding of tax regimes which are vastly different in operation and implementation to UK law. We are able to provide help to businesses seeking to understand these rules and to ensure that business is not affected by the end of the Brexit transition period. 

We are finding that a number of businesses are missing small, but potentially expensive, local requirements when considering their Brexit plans which could result in significant problems after 1 January 2021 if not resolved. 

If you would like to discuss the issues contained above in more detail, please contact Richard Holm or Anne Holt.