The UK left the EU on 31 January 2020, but the UK/EU Withdrawal Agreement provided for a transition period during which the UK continued to be treated as if it was an EU Member State. This transition period ended on 31 December 2020, meaning that the UK is now neither an EU Member State nor (with the exception of Northern Ireland) treated as such. Northern Ireland will be treated as part of the EU for the purposes of supplies, intra-Community acquisitions and imports of goods (but not the supply of services).
For VAT purposes, this new framework entails that the special VAT refund procedure provided for in Directive 2008/9/EC for the benefit of taxable persons established in another EU Member State, will no longer apply to companies established in the UK (with the exception of companies established in Northern Ireland in respect of supplies of goods).
Instead, a UK company that incurs VAT in an EU Member State where it is not established would have to apply for a refund pursuant to the special procedure for persons established in non-EU countries provided for in Directive 86/560/EEC (the Third Country VAT Refund Procedure).
In addition to the wider discretion given to the EU Member States to regulate the Third Country VAT Refund Procedure, the main difference between the two Directives is that EU Member States may impose the following two conditions in respect of the Third Country VAT Refund Procedure, but not the standard refund procedure regulated in Directive 2008/9/EC:
- the appointment of a tax representative in the EU Member State in question; and
- making the VAT refunds conditional on the granting by third States of comparable advantages regarding turnover taxes (reciprocity rule).
Spain has introduced both conditions in article 119 bis of the Spanish VAT Law (regulating the Third Country VAT Refund Procedure). Therefore, only taxpayers from non-EU countries with a reciprocal agreement in place may apply for a VAT refund (e.g. nowadays Monaco, Canada, Japan, Switzerland, Israel and Norway). Nonetheless, a refund is always given for VAT paid in relation to (i) hospitality, catering and transport services incurred when attending trade fairs, congresses and exhibitions held in Spain; (ii) the purchase of templates, moulds and equipment in Spain by non-established VAT taxable persons to be made available to established VAT taxable persons to produce goods to be exported to such non-established VAT taxable persons immediately after they are manufactured (or destroyed if this is not the case); and (iii) goods and services acquired by non-established VAT taxable persons subject to the special regime for providing telecommunications, broadcast and television services or electronic services, subject to certain requirements. The latter means that all companies, regardless of their place of establishment, can reclaim Spanish VAT in these scenarios.
On 5 January 2021, the General Tax Directorate recognised the existence of reciprocity with the UK for the purposes of the Third Country VAT Refund Procedure. This represents a significant advantage for UK companies compared with US companies, for instance, as it recognises the formers' right to benefit from the Third Country VAT Refund Procedure.
It should, however, be borne in mind that the Third Country VAT Refund Procedure will not apply with respect to those supplies of goods and services which, in the UK, do not result in the refund of input VAT, in particular, in connection with the following transactions:
- Acquisition of goods or services that will not be used in the taxpayer’s business activity
- Acquisition of goods and services intended for resale
- Acquisition of goods and services related to entertainment or services of a recreational nature
- Acquisition of a motor vehicle
- 50% of the input VAT on the rental or leasing of a motor vehicle
During the period in which the special protocol for Northern Ireland is in force, companies established in Northern Ireland for VAT purposes (and not established in Spain) will be entitled to recover Spanish input VAT following the standard procedure for EU established companies, except for VAT borne with respect to services located in Spain, in which case the refund will need to follow the same Third Country VAT Refund Procedure as for UK established persons.
Therefore, UK companies that purchase goods and services (except for Northern Irish companies in respect of purchases of goods) in Spain will be able to seek a refund of input VAT accrued as of 4 January 2021 (i.e. the date of the reciprocity agreement) in accordance with the Third Country VAT Refund Procedure described above, with certain limitations. It follows that such companies will no longer be able to submit their request electronically through the UK tax office website and will have to submit their refund claims to the tax office in Spain.
The Spanish General Tax Directorate recognises reciprocity with the UK for the purposes of the Spanish VAT refund procedure for companies established in the UK (not established in another EU member State, including the Canary Islands, Ceuta or Melilla) and, therefore, eases the refund of any Spanish input VAT borne by UK companies in their business activities.