The impact of Brexit on VAT

In the referendum held on 23 June 2016, the United Kingdom voted in favour of exiting the European Union. Although the two-year exit process is yet to commence, consideration should be given to the tax implications that may arise, especially with regard to customs, excise and value added taxes.

Transactions between the United Kingdom (UK) and the countries of the European Union (EU) are currently considered to be intra-community transactions, with an obligation to pay VAT (through a reverse charge mechanism) on assets sent and received. This allows for the free movement of goods, and the situation is similar for the provision of services.

After Brexit (a two-year process that is, at the time of publishing, yet to commence), the sale and purchase of assets between Italy (or other EU member countries) and the UK may no longer be considered intra-community transactions. Instead, assets shipped from Italy to the UK would be classed as export supplies, while incoming goods from the UK would be classed as imports. 

With regard to the provision of generic services pursuant to Article 7-ter of Presidential Decree 633/72, formal requirements would change. Services provided should therefore be identified as “not subject to” transactions. With regard to services received, the Italian taxable entity would be required to apply the reverse charge mechanism, issuing a self-billing invoice. Completion of the invoice received from the British service provider would no longer be necessary. In addition, it would no longer be obligatory to declare the transactions on the Intrastat summary lists pursuant to Article 50, paragraph 6 of Law Decree 331/1993.

Another consequence of a completed Brexit would be the loss of the simplifications that are currently applied among the EU member states. Entities established in the UK would therefore be able to identify themselves as non-resident entities for VAT purposes in Italy only through the appointment of a tax representative in accordance with Article 17, paragraph 2 of Presidential Decree 633/72 and no longer through the identifying procedure set out in Article 35-ter of Presidential Decree 633/72.

It is likely that a similar situation would arise when a taxable Italian entity intends to operate in the UK. It should be noted that, in the future, a British entity that purchases assets in Italy and subsequently resells them to another Italian taxable entity, not creating any domestic tax position, would need to go through a process to recover the VAT paid on the purchase. This process will be much more cumbersome than that which is currently in place for member states.

Some repercussions are also foreseen in e-commerce where, in the case of direct e-commerce, the British operator must necessarily appoint a tax representative in one of the member states. Another consequence would be the loss of the right of Italian economic entities to request a refund for taxes paid in the UK (the non-resident tax refund in accordance with Article 38-bis of Presidential Decree 633/72).

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Elisa  Langiano
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