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Should we start preparing for Brexit?

At the moment, nobody knows what will happen to Brexit, if it will happen at all or if it will be postponed. There are many possible scenarios but prudent business operation requires us to prepare for a no-deal Brexit even if we are still hoping for Brexit to be postponed.

How should we prepare in such an uncertain situation? Should we take a waiting position saying that for now, we do not know what the future will bring so it is better to decide what to do later when the situation will be clear to see. If Brexit is not postponed we will not have a lot of time left to prepare for its impact. For this reason, preparation for the worst and nearest scenario should start now! 

Can a "no-deal" Brexit be avoided?

The way things stand at the moment, there are four alternatives to a no-deal Brexit, i.e without reaching a withdrawal agreement: 

  1. If the United Kingdom and the EU approve the so-called "divorce agreement", the UK receives another 21 months (until about the end of 2020) to prepare for Brexit. During this time, the UK will not participate in the EU's system of institutions (the European Parliament, the Council, the Commission etc.) but the provisions regarding the free movement of goods and services will remain in place. 
  2. The UK revokes its declaration regarding Article 50 (the leaving of the EU). According to a December 2018 decision of the Court of Justice of the European Union, the United Kingdom may do this unilaterally. 
  3. The EU and the UK jointly agree on the extension of the deadline. The EU will most likely be willing to grant an extension of maximum 3 months unless general elections or a new Brexit referendum will take place in the United Kingdom within a short time. 
  4. The EU and the UK jointly reach a new "divorce agreement", which would, however, have to be approved by both the United Kingdom and the EU. 

No-deal Brexit happens if none of the four alternative scenarios outlined above is implemented: in this case, the United Kingdom will qualify as a non-EU, i.e. a third country. 

At the moment, we do not know which scenario will be realized. What is for certain, however, is that each version has different consequences in terms of VAT, taxation and customs. Preparations should be made for the worst-case scenario, i.e. a no-deal Brexit as only two months remain until this deadline. 

What effect will Brexit have on VAT?

If the no-deal Brexit scenario applies, goods coming from the United Kingdom will qualify a imported goods and goods sold to the UK will be regarded as exported goods. In order for the supplies to remain exempt from tax, it will not be sufficient just to collect CMR-s. For tax exemption it will not also be necessary that the customs authority exits the goods permanently in a certified manner with. Accordingly, companies will have to transform their invoicing programs, enterprise resource planning (ERP) and other IT systems. 

The simplification for triangle transactions will not apply in the case of British tax numbers as triangle transactions only apply to Community taxpayers. Similarly, the simplifications relating to buyer stocks will also not be applicable in trading with British companies. This may have an impact on two areas. On the one hand, it will be more likely that Hungarian companies will have to apply for a tax number in the United Kingdom if this will be required under the British rules to be implemented. On the other hand, British companies will have to apply more frequently for a tax number in Hungary and in other member states. 

Brexit may also influence the businesses operating webshops from the United Kingdom. According to current rules, the taxpayer whose distant sales do not reach a value limit of EUR 35,000 annually for a certain member state, do not have to apply for a tax number in the target country (this limit is currently higher in the UK, the Netherlands and Germany). However, this rule only applies to Community businesses. This means that the British companies currently selling goods from British warehouses will have to pay the VAT of the target country below the EUR 35,000 value limit also under the title of importation of goods. However, if the British company take their stocks to an EU member state, e.g. to Hungary or the Netherlands, it will only have to register for VAT purposes in this country in the case of supplies below the limit of EUR 35,000. 

The British companies having a tax number in Hungary will only be able to continue their economic activity here through a fiscal representative! Special rules apply to fiscal representation which also include extra requirements for the fiscal representatives. The British companies concerned should start looking for entities licensed to act as fiscal representatives now. It is unclear at the moment what will happen to the British businesses that have a Hungarian tax number but do not have a fiscal representative on the day of Brexit, whether their tax number will be deleted ex officio or the tax authority will grant some period of grace for these companies. 

It will soon turn out whether the British will manage to leave the EU the English way or we will continue to say good-byes for another two years under temporary provisions. 

Click here for the Hungarian  version Of this blog!

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