What is no-deal Brexit?
No-deal Brexit means the United Kingdom will leave the European Union and will be treated as a non-EU country for customs and VAT 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 implications of Brexit for UK companies in the UK?
The UK’s HMRC has issued letters to VAT-registered businesses trading with the EU on the potential impact of no-deal Brexit.
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 authorities (Ministry of Finance, National Tax and Customs Office) have not yet issued any guidance on tax implications of Brexit. The officials will most likely wait until more is known how Brexit will evolve and will react to it after Brexit or just before Brexit.
Such official statement may happen in the very last minute or even after the Brexit day (depending on the political developments around Brexit) which would leave little to no time for the UK companies to make necessary preparations. We, therefore, advice UK clients not to wait until the Hungarian authorities make the announcements, but to take action based on the worst-case scenario, while remaining vigilant to any potential change in the plan due to the announcements from the authorities.
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. The officials will most likely wait until more is known about the most likely Brexit scenario and only after that will they react with the official statement on reciprocity. We do not expect this to happen in 2019.
This means 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.
Authorities have not issued any announcements that would provide relief from appointing a fiscal representative for the UK companies post-Brexit. Assuming the UK will leave the EU on 31 October 2019, UK companies will be required to appoint a fiscal representative in Hungary to be able to start or to continue to operate.
What if the UK Company is already registered for VAT in Hungary? Would such a UK company also need to appoint fiscal representative?
Yes, unless the authorities would issue a guidance that would state otherwise. Authorities have not issued such guidance yet.
Because of authorities have not issued any guidance on the matter, we recommend all UK companies that are registered for VAT in Hungary to appoint a fiscal representative as soon as possible.
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.
What happens if the UK company will not appoint fiscal representative until 31 October 2019?
We know it is a legal requirement to appoint fiscal representative but we do not know exactly how will the Tax Authority react if a UK company fails to appoint fiscal representative by 31 October 2019. Implications may vary and may include the following scenarios (from light to severe):
- Nothing happens. Tax Authority will be slow to react to the fact that the UK has left the UK and will not update its database immediately. However, they may update it at a later stage and the consequences listed below may come into effect at a later stage.
- Tax Authority will write a letter to the affected UK businesses asking them to take action and appoint fiscal rep. If the UK appoints fiscal rep within the deadline, no further complication will happen.
- Tax Authority will not write a letter but will update its taxpayer’s database, so that only the fiscal rep is able to submit the VAT or other tax return. The first post-Brexit VAT return is due on 20 November 2019. Under this scenario, the UK companies will have time to appoint fiscal rep until v to avoid sanctions related to non-submission of VAT returns. The UK entities that fail to appoint fiscal rep by 20 November 2019, may face penalties.
- No VAT refund will be granted without the fiscal representative being registered by the Tax Authority
- Tax Authority will cancel the existing VAT ID of the UK business. This is by far the worst case scenario because the UK company will not be able to issue an invoice, get a VAT refund and operate in a normal manner in Hungary. Moreover, once de-registered, re-registering will most likely result in a new VAT number, which would mean that the UK company would need to change contracts, tax codes, make changes in the ERP and invoicing software, etc.
It is not likely that the Tax Authority will cancel VAT IDs of the UK companies that fail to appoint the fiscal representative on the day after the Brexit, but it will most likely happen at a certain point of time in the future. Taking into account the highest possible risk, we advise UK companies not to risk deregistration and switch to fiscal representation as soon as possible.
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. 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.
After no-deal Brexit, UK companies will not be able to recover Hungarian VAT without VAT registration in Hungary, and they must appoint a local fiscal representative in Hungary.