Tackle VAT issues in the build-up to Brexit

Although the EU VAT regime will remain in place until negotiations between the UK and the EU will be concluded, it is most likely that new UK VAT legislation will come into force in the spring of 2019. It seems you have enough time, but I highly recommend to anticipate on these law changes as soon as possible.

Marc van Rijbroek – indirect tax expert at PwC

A thorough and effective preparation should include a stakeholder analysis and the development of a SAP roadmap for change. This will provide insight into the work effort and the amount of time and money that you’ll need to invest. To help you manage and process changes, such as 'Brexit' or the accession of a new EU member state, PwC developed the SAP add-on tax engine Taxmarc. When this add-on is up and running in your SAP environment changes become transparent and easy to manage.

VAT implications of Brexit

After Brexit, trade between the UK and EU countries will be treated again as imports and exports and will, most likely, result in the obligation to pay customs duties. The UK regains the right and flexibility to reintroduce its own VAT legislation. Besides, this can be done much quicker as EU approval is no longer required. This new VAT legislation will include new VAT rates, a different scope of exemptions and ‘place of supply’ rules that could result in double taxation or non-taxation.

VAT reporting will change as well and EC Sales Lists and Intrastat reporting will no longer apply. UK businesses operating in the EU and companies abroad with a UK VAT registration will be impacted by changing VAT compliance obligations. An analysis should be made of, for instance, invoicing and reporting requirements, cross-border supply chains, distance sales rules and VAT cash flow positions.

With respect to chain transactions UK companies or (non-)EU companies with a UK VAT registration can for example no longer be party B in a simplified triangulation, unless that UK company is also VAT registered in the EU. 

Changes in SAP: assess, redesign and test!

In order to implement Brexit, SAP settings have to be changed. From an operational perspective processes and controls of companies have to be updated to the new situation at hand. SAP must reflect these changes which means that tax determination logics, tax codes, invoice and reporting requirements have to be assessed and the new rules should be implemented.

Besides assessments by the tax function, a considerable effort by the IT department is required to implement Brexit. Change management processes follow strict IT policies and specific and extensive test rules apply before changes can go to the ERP production system. Those mandatory test cycles are time consuming and have a huge impact on resources.

When manual processes and controls are set up to manage complex VAT transactions that include dealing with the UK, new guidance should be drafted and ongoing review should take place to check if these new procedures are actually complied with.

The benefits of PwC’s SAP add-on Taxmarc

In the ideal world implementing Brexit only requires switching the EU indicator field in SAP from ‘EU’ to ‘Non-EU’. This should result in, for instance, UK transactions being automatically considered as import and export. Or a tax control framework that automatically stops ABC transactions in the EU with a UK company as the middle party (B).

However, transaction mapping of cross-border trade flows in order to review the impact of a legal change is often still a manual and interview-based exercise. Taxmarc provides you with a personalised work centre (cockpit) in SAP in which you have real-time access to UK transactions. The cockpit makes it possible to immediately zoom in on (chain) transactions involving the UK and make changes on the spot.

Such a SAP cockpit is not only important for UK companies, but also, or even more so, for companies dealing with the UK. By means of this cockpit you can implement and configure new UK VAT legislation in a timely, cost-efficient and effective manner. A Tax Control Framework embedded in SAP can automatically check non-VAT compliance. For example, the UK as the middle party in a simplified triangulation is automatically blocked and put on an audit list with an email alert just because you have changed the country setting from EU to Non-EU. All these functionalities are included in PwC’s SAP add-on tax engine Taxmarc.

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