01 March 2021
The course of the Brexit negotiations between the UK and the EU meant that leaving the EU's VAT union seemed likely, if not inevitable, from quite early on in the process.
This means that the UK now enjoys more flexibility in how to levy VAT.
This newfound freedom began with the abolition of VAT on women's sanitary products on 1 January 2021 following similar measures in Australia and Canada. However, like so many other aspects of Brexit, there is a cost to this measure.
More widely, there have been other well-publicised costs associated with the trade in goods post-Brexit. However, what is now becoming clear is that there are also costs for businesses buying services from the EU.
Some EU Member States, in particular Spain, have implemented changes in the VAT rules for services that mean that trade with non-EU businesses is taxed differently to the same services provided to EU businesses. For UK businesses, this means that services that have previously been subject to VAT in the UK are now, in principle, subject to VAT in both Spain and the UK. Even if the UK business is entitled to reclaim UK VAT in full, the entitlement to recover Spanish VAT is far from clear. At the very least UK businesses are likely to face significant delays in getting this refunded. Amounts not refunded will represent another increased cost of doing business.
EU VAT law allows individual countries some discretion on how they manage their taxes. Some of these measures are adopted by countries to ensure that services that would otherwise be subject to VAT do not escape the EU VAT system altogether. Spain's implementation of the ‘use and enjoyment’ provisions is just one example of these measures. The laws mean that some services, eg marketing services, which are provided to EU businesses are taxed in the recipient's member state. By contrast the same services, if they are used and enjoyed in Spain (for example they relate to a marketing campaign targeting Spanish consumers) but received by a UK company are subject to Spanish VAT at 21 per cent.
This raises the question as to whether this Spanish VAT can be reclaimed from the Spanish government. In theory a refund mechanism does exist. However, there are a variety of complicating factors. The UK may have to establish that there is a reciprocal arrangement (can Spanish businesses recover UK VAT?); are original documents available evidencing the claim; have you met the relevant time limits? For some organisations, particularly those in the financial services sector, some restriction in recovery seems inevitable. Even if your business meets all of the relevant criteria, there will no doubt be delays; it is likely that Spanish VAT paid today won't be recoverable for several months and in some cases could take over a year.
If you're considering doing business in the EU it's critical that VAT considerations are included in your decision-making process to avoid unnecessary red tape, not to mention unforeseen costs. Careful planning of your structure should consider and ideally mitigate these costs. Of course, if you find yourself inadvertently affected by these changes, specialist advice should be taken to allow you to consider your options.