The Withdrawal Agreement (‘WA’) renegotiated between the UK and the EU on 17 October 2019 provides for a transition period for the UK where it will, to all practical intents and purposes, remain in the EU for a period of time after Brexit occurs at 11pm on 31 January 2020.
Under the terms of the WA, the Transition Period came into effect immediately (ie 1 February 2020) and last until 31 December 2020. At this point the terms of the future relationship, intended to be an extensive free trade agreement (FTA),would take effect.
During the transition period, the UK will continue to be part of the Single Market, EU VAT regime and Customs Union. This means that businesses will have a period of certainty where they can continue to trade using existing VAT and customs procedures – in other words nothing should change during this period.
There is a provision in the WA that should both the UK and EU agree, an extension of up to two years could be applied, however, the length of any extension must be agreed before 1 July 2020 which would mean a maximum period ending on 31 December 2022.
Should the terms of a trading relationship not be agreed by 31 December 2020 and there is no extension to the current transition period, the UK could still face a no deal Brexit
This document focuses on the possible consequences of the no del Brexit, i.e. what will happen with the UK business operating in Hungary should the trading relationship be not agreed by 31 December 2020.
What does it mean for VAT?
No-deal Brexit means the United Kingdom will leave the European Union and will be treated as a non-EU country for customs and VA T purposes. In particular, goods entering the UK from the EU will be treated as exports in the country of origin and not Intra-Community supplies of goods and imports in the UK. Likewise, supplies of goods from the UK into the EU countries will be treated as imports in the EU.
What are the main implications of Brexit for the Hungarian companies trading goods with the UK companies?
Hungarian companies supplying goods into the UK must be prepared to treat these supplies as exports, not Intra-Community supplies of goods. This means tax codes and other settings should be updated in the ERP and in the invoicing system. New processes should be put in place to assure conditions for zero-rating are met, i.e. CMRs and other transport documents will not be sufficient to ascertain zero-rating.
Hungarian companies purchasing goods from the UK may wish to check INCOTERMS and update the contracts to clear which party will be responsible for the customs clearance of goods entering Hungary.
What do Hungarian authorities say about Brexit tax issues?
The Hungarian National Tax and Customs Office has issued a guidance on tax implications of Brexit in the event of the no deal Brexit. Essence of the guidance relevant to the UK companies is presented below.
Will UK companies be able to obtain VAT refund post Brexit?
Before Brexit, the UK companies were able to rely on the relatively simple electronic VAT refund procedure through HMRC’s website, known as 8th VAT Directive refund procedure. After Brexit, the UK companies will no longer be able to obtain a VAT refund through the 8th VAT refund procedure.
The 13th VAT refund procedure will not be open for the UK companies due to lack of reciprocity announcement. The Hungarian government has not yet announced plans to provide for reciprocity arrangements, mostly because of the multitude of scenarios related to Brexit. Even, if the reciprocity is in place, a separate legislative procedure should include the UK into the VAT Act list of the countries with reciprocity.
If no reciprocity is provided the UK companies will not be able to recover Hungarian VAT unless they are registered for VAT in Hungary.
What are the conditions for the VAT registration in Hungary?
The UK companies that make supplies deemed to be taxed in Hungary (according to the place of supply rules) which are not subject to the international reverse charge mechanism must register for VAT in Hungary. VAT registration is an obligation. This also means that there is no room for the voluntary VAT registration, i.e. the legal basis for the VAT registration must exist for the UK companies to be able to register for VAT.
However, the UK companies may choose business operational models that would create such legal basis for the VAT registration. This way the UK companies will be able to recover Hungarian VAT charged to them.
RSM Hungary can assist the UK companies in business model re-structuring that involves logistical, customs, VAT, invoicing and contractual aspects of the best operational model.
Is fiscal representation needed for the UK companies post Brexit?
Generally, non-EU companies wishing to obtain/obliged to VAT registration in Hungary must appoint a local fiscal representative in Hungary. The fiscal representative has joint and several liability with the taxpayer. There are special conditions for fiscal representation, therefore not all service providers would qualify. RSM Hungary is qualified to provide fiscal representation services.
The fiscal representative fulfills the tax liabilities such as filing the tax returns, representation during tax audits, communication with the tax authority etc.
As there is a joint liability, fiscal representatives usually require financial guarantees in order to mitigate the risk.
The Hungarian National Tax and Customs Office has specifically mentioned in its guidance that under current legislation the UK companies are obliged to appoint a fiscal representative after the transitional period expires to be able to start or to continue to operate in Hungary.
What if the UK Company is already registered for VAT in Hungary? Would such a UK company also need to appoint fiscal representative?
Yes, the Hungarian National Tax and Customs Office has specifically mentioned in its guidance.
The guidance also says there is no need to re-register for VAT, only to appoint a fiscal representative and to notify the tax authorities about this appointment.
Will the VAT number remain the same after switching to fiscal representation?
Yes, the same VAT ID. However, if the company is de-registered and then re-registered for VAT, it will most likely receive a new VAT ID.
How long does it take to switch to fiscal representation/register for VAT in Hungary?
It usually takes 2-3 weeks and the fiscal representation is possible even before the Brexit day, i.e. during the transition period. However, if there will be a last-minute surge in fiscal rep appointment, this process may take a longer time. We, therefore, advise UK companies to switch to fiscal representation as soon as possible. Collecting documents necessary for the registration may also take some time as well as setting up a financial guarantee.
How RSM Hungary can help?
RSM Hungary is a leading service provider of fiscal representation in Hungary with more than 15 years’ experience. We are already prepared for providing full-scope fiscal representation services and assisting our clients to minimize the risks and uncertainties associated with Brexit. RSM Hungary can assist the UK companies in business model re-structuring that involves logistical, customs, VAT, invoicing and contractual aspects of the best operational model. We can also assess the client’s Brexit readiness in Hungary.