So a Brexit without any agreement is being considered a very real possibility. How would this affect VAT on transactions between Spanish and British companies ?
Current members of the European Union apply the provisions of the the EU 6th VAT Directive. By far the most important regulation included in the Directive regards the VAT on the provision of services between businesses in different EU countries. For instance, if a consultancy business based in Spain provides B2B services to a UK company, then no Spanish VAT needs to be added to their invoice. This is the so-called Reverse Charge principle, where the place of supply of goods is considered to be where the customer is based, and therefore in this case the UK customer would account for the UK VAT on the invoice as both Output and Input VAT, the net result being zero.
After Brexit, the same Spanish consultancy company sends an invoice to its UK customer. Spanish VAT cannot be applied because the UK is now outside the scope of application of EU VAT. The customer would not apply the reverse charge because they are no longer governed by EU VAT legislation. So the transaction would simply be exempt from Spanish VAT. In a similar way, invoices on professional services by a UK consultancy business to a client in Spain will be exempt from UK VAT.
Being exempt rather than zero-rated transactions, any local VAT on costs associated with the provision of services will not be deductible. So in the case of a Spanish consultancy company providing services to clients in other EU countries (80%) as well as clients in the UK (20%), then 20% of the Spanish VAT on associated expenditure (phone, internet, commissions etc.) would not be deductible. So in this respect, it is the Spanish businesses which will suffer from Brexit more than their UK counterparts !
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