With the end of the transition period as of 1 January 2021, the UK officially became a third country with respect to the EU, meaning that the EU VAT Directive has ceased to apply to it.
It is therefore important to review the VAT treatment of cross-border transactions with the UK. Below you will find a brief summary of the main changes in this regard.
1) Supply of goods
Note that Northern Ireland is still considered part of the EU for supplies of goods, meaning that all movement of goods between Northern Ireland and Member States are to be considered as intra-Community transactions subject to EU VAT rules.
As from 1 January 2021, any supply of goods transported from Luxembourg to the UK qualifies as an export of goods, instead of an intra-Community supply of goods (“ICS”). From an invoicing perspective, this qualification does not entail adverse VAT consequences, as both ICS and exports are VAT-exempt in Luxembourg. Naturally, however, Luxembourg companies should anticipate new customs formalities. On the compliance side, export transactions need no longer be included on an EC Sales List (“ESL”), and should be reported in a different box on the Luxembourg supplier’s VAT return: box 014 of the annual VAT return form instead of box 013. Finally, note that the application conditions for securing VAT-exempt status differ substantially between ICS and exports, especially in light of the implementation of Quick Fixes.
For the reverse route, i.e. for acquisitions by Luxembourg companies of goods transported from the UK to Luxembourg, this type of transaction now qualifies as an import of goods instead of an intra-Community acquisition of goods (“ICA”). In practice, this new qualification does not automatically have particular VAT consequences, as both types of transaction are subject to VAT in Luxembourg. On the compliance side, such imports are to be reported in a different box on the Luxembourg VAT return: box 065 of the annual VAT return form instead of box 051.
In the case of supplies of goods without transport, sales are subject to VAT in the place where the goods are located at the time of the supply, i.e. outside the EU if located in the UK (and thus clearly subject to UK VAT).
For B2C transactions, the distance sales regime no longer applies, and any supply with transport made by a Luxembourg company to a UK private individual is to be treated as an export from a Luxembourg perspective. Prior to Brexit, Luxembourg companies selling goods to UK private individuals for a total annual amount below the UK threshold (GBP 70,000.00) could directly apply Luxembourg VAT to the relevant invoices. As from January 2021, however, Luxembourg companies must treat sales toward UK private individuals as VAT-exempt exports of goods, and should anticipate customs formalities.
For the reverse route, supplies of goods by UK companies to Luxembourg private individuals qualify as taxable imports in Luxembourg. Prior to Brexit, UK companies selling goods to Luxembourg private individuals for a total annual amount below the Luxembourg threshold (EUR 100,000.00) could directly apply UK VAT to the relevant invoices. As from January 2021, however, UK companies must treat sales toward Luxembourg private individuals as VAT-exempt exports of goods (which will be considered VAT-taxable imports of goods in Luxembourg).
2) Supply of services
The general B2B “place of supply” rule remains unchanged; i.e. services are taxed in the recipient’s place of establishment. Accordingly, a Luxembourg law firm supplying legal services to a UK company would still issue its invoices without Luxembourg VAT, under the reverse charge mechanism. However, it is no longer necessary to include to the foreign VAT number of the UK company or to report the transaction on an ESL.
For the purposes of tax declaration, such services are to be reported by Luxembourg companies in box 019 of the VAT return (instead, pre-Brexit, of box 423 in the case of taxable services, and box 424 in the case of VAT-exempt services).
Although the reverse charge mechanism remains unchanged in this respect, the input VAT recovery right linked to certain services supplied by Luxembourg companies to UK companies could be positively impacted. As from January 2021, Luxembourg companies are now entitled to deduct input VAT for financial and insurance services provided to UK companies. As a consequence, the VAT status of Luxembourg holding companies that grant loans to UK borrowers has changed: instead of the simplified VAT regime, the regular VAT regime must now be used if the new right of VAT deduction is to be exercised (even partially). Similarly, Luxembourg companies that are merely involved in a UK financing activity and that were not required to register (i.e. because there was no receipt of taxable costs from foreign suppliers) are now required to register under the regular regime for VAT purposes due to their entitlement to the VAT deduction right. Particular attention should therefore be paid to the VAT compliance obligations of Luxembourg companies providing financial and insurance services to UK recipients.
In case of B2C supplies of services, the place of taxation is the supplier’s place of establishment, with the exception of cases in which the B2C recipient is located outside the EU and the supply concerns advertising, IT, consultancy, banking, financial or insurance transactions (among others). Previously for such transactions (pre-Brexit), Luxembourg suppliers had to apply Luxembourg VAT for the relevant invoices to UK non-taxable persons. Now, VAT no longer applies as from January 2021.
UK taxable persons can incur Luxembourg VAT on some types of expense, such as representation costs. As from January 2021, UK taxable persons are required to use the VAT refund procedure under the 13th VAT Directive. On the reverse route, if a Luxembourg taxable person were to incur UK VAT, it would have to contact the UK VAT authorities in order to determine the VAT refund process, if any. Note that UK VAT incurred on transactions carried out in 2020 can still be subject to a VAT refund request through the Luxembourg VAT refund portal until 31 March 2021.
Below you will find a table summarising the main Luxembourg VAT impacts arising from Brexit.
VAT impacts of Brexit
|Nature of the supply||Status of the parties||Flow||Lux VAT treatment||Reporting on the annual VAT return form||Reporting on the ESL||Customs formalities|
|Supply of goods with transport||B2B||Lux to UK||ICS – VAT exempt||Export – VAT exempt||Box 013||Box 014||Yes||No||No||Yes|
|UK to Lux||ICA – subject to Lux VAT||Import – subject to Lux VAT||Boxes 051/056||Boxes 065/407||No||No||No||Yes|
|B2C||Lux to UK||Subject to Lux VAT (if below the distance sale threshold)||Export – VAT exempt||Boxes 037/046 (if below the distance sale threshold)||Box 014||No||No||No||Yes|
|UK to Lux||Subject to UK VAT (if below the distance sale threshold)||Import – subject to Lux VAT||N/A||N/A||N/A||N/A||No||Yes|
|Supply of taxable services||B2B||Lux to UK||Subject to UK VAT||Subject to UK VAT||Box 423||Box 019||Yes||No||No||No|
|UK to Lux||Subject to Lux VAT||Subject to Lux VAT||Boxes 436/462||Boxes 463/464||No||No||No||No|
|B2C||Lux to UK||Subject to Lux VAT||Subject to Lux VAT (except in certain situations with no Lux VAT)||Boxes 037/046||Boxes 037/046 (except in certain situations requiring Box 019)||No||No||No||No|
|UK to Lux||Subject to UK VAT||Subject to UK VAT (except specific UK exemptions)||N/A||N/A||N/A||N/A||No||No|
- Bruno Gasparotto, Partner
- Claire Schmitt, Senior Associate
Compliments of Arendt & Medernach – a member of the EACCNY.