We are now over four months into the new trading relationship between Ireland and the UK. While there are still teething issues, many Irish companies will have largely adapted to the new VAT and customs arrangements for trade in goods between the two countries. However, there are other VAT implications from Brexit which may have been less obvious. This month’s article considers these implications in more detail.

Impact on VAT treatment of certain services

The general VAT place of supply rules for services supplied from Irish suppliers to UK customers largely continue to apply. A service supplied from Ireland to a “taxable person” (i.e., a business) in the UK will continue to be outside the scope of Irish VAT. A service supplied from Ireland to a non-taxable person (e.g., a private individual) in the UK will continue to be within the scope of Irish VAT. However, in the latter scenario, there is a list of services in Section 33(5) of the VAT Consolidation Act 2010 which fall outside the scope of Irish VAT when supplied to a non-taxable person who is established outside of the EU, which includes the UK (including Northern Ireland) from 1 January 2021. The list is fairly extensive and includes services provided by consultants, engineers, lawyers and accountants. This may result in Irish VAT no longer being chargeable on such services.

However, other services supplied to or from the UK which were not previously subject to Irish VAT may now become subject to Irish VAT. This will largely arise under the “use and enjoyment” provisions contained in Section 35 of the VAT Consolidation Act 2010. Broadly, these provide that where certain services which would normally fall outside the scope of Irish VAT but are “used and enjoyed” in Ireland, such services would be subject to an Irish VAT charge. The types of services to which these provisions apply include the hiring of movable goods, the supply of telecommunication or broadcasting services to a non-taxable person, and the supply of financial services and insurance to a non-taxable person. Specifically, in the case of leasing of means of transport assets, the use and enjoyment rules can also result in such services falling outside the scope of Irish VAT if the lease is used and enjoyed outside the EU. However, the UK has equivalent use and enjoyment rules which may result in UK VAT being due in such circumstances.

Impact on VAT recovery for financial services and insurance providers

It is well-established that the supply of VAT exempt services ordinarily does not give a right to VAT recovery on related costs. However, the supply of VAT exempt financial services to non-EU recipients is a “qualifying activity” which does give a right to VAT recovery on related costs. Therefore, VAT recovery is available on costs in relation to financial and insurance services supplied to UK (including Northern Ireland) established recipients from 1 January 2021. This should also increase the general overhead VAT recovery rate for financial and insurance providers if they have UK-based customers.

Many financial businesses will be reviewing their VAT recovery rate for 2020 in advance of filing their May/June 2021 VAT return (which is typically the latest return for making an annual adjustment for the prior year). The change in the UK’s status will not directly impact those calculations as the UK continued to be treated as an EU Member State during the transitional period which came to an end on 31 December 2020. However, in considering their recovery rate for 2021, the impact of the UK leaving the EU should be considered.

Impact on e-commerce sellers into the UK

Sellers of electronically supplied services, as well as telecommunication and broadcasting services, to private consumers in the UK can no longer use the mini One Stop Shop (MOSS) to pay UK VAT due on such services. Such suppliers now need to register for UK VAT in order to report VAT on those sales. In addition, sales of goods to consumers in Great Britain are subject to UK VAT if they are delivered in consignments with a value of less than £135. This may also prompt a UK VAT registration for e-commerce sellers into the UK.

Impact on VAT56 authorisations

A VAT 56 authorisation allows businesses which derive at least 75 percent of their turnover from the supplies of goods dispatched from Ireland to purchase most goods and services at the zero-rate of Irish VAT. While Brexit does not alter companies’ entitlement to a VAT56 (as both intra-Community supplies and non-EU exports count equally towards the 75 percent threshold), the Brexit Omnibus Act 2020 – which came into effect on 31 December 2020 – included a number of amendments to Section 56 of the VAT Consolidation Act 2010.

The amendments appear to apply stricter criteria for obtaining an authorisation and give Revenue greater powers to revoke a VAT56 authorisation if they conclude it is being misused. The updated legislation states that the applicant must be able to demonstrate that they have met the 75 percent threshold for a period of 12 months immediately preceding the application. Previously, Revenue may have accepted confirmation from start-up businesses that the threshold would be met. In addition to giving Revenue the power to cancel an authorisation if they are satisfied the conditions are no longer met, Revenue also have enhanced powers to notify suppliers to that person so that they are aware the VAT56 is no longer valid.

David Duffy is Indirect Tax Partner at KPMG