Ann Jones, European Managing Director of VAT IT and Gareth Kobrin, CEO of VATGLOBAL, reveal the potential impact to UK corporates as a result of changes to the VAT system as a result of Brexit and how they should be planning for the new environment
Behind the headlines that surround Brexit, such as the recent “breakthrough” announcing the estimate of the divorce bill, important issues that will most effect the day to day workings of UK businesses are being somewhat neglected. VAT is one such issue, and it’s an important one, where the impact of Brexit could be hugely significant if left unresolved.
The changes in the cross-border trade bill that were announced on Monday now mean over 130,000 UK firms will have to pay VAT upfront when goods cross the UK/EU border, rather than after the final purchase by the customer as is currently the position.
Not only would this create more, some would say unwanted, bureaucracy, but as Commons Treasury select committee chair Nicky Morgan pointed out, the move could be a nightmare for businesses resulting in hefty cash flow implications as payments are moved forward long before tax can be recovered from HMRC. Most businesses navigating the Brexit minefield are simply not prepared to handle additional changes such as these or afford the additional costs in both money and time.
The current rules companies follow are the result of the UK being in the EU VAT area. This means when goods enter the UK, they aren’t subject to VAT as they are instead treated as intra-community dispatches and acquisitions, with VAT generally accounted for under a ‘reverse charge’ mechanism.
However, once the UK leaves the single market, supplies made to and from the UK will be treated as imports and exports and will therefore be subject to import VAT, customs duties and additional administration. Of course, we’re all waiting to see whether trade negotiations will result in WTO rules or specially agreed terms, neither however resolve the issue of VAT.
The solution to this isn’t at all obvious – it is almost certain that the UK will have to introduce some kind of import VAT deferment scheme to alleviate this VAT burden. This could be similar in nature to the progressive Article 23 licence concept in the Netherlands, which defers import VAT until the end of the accounting period instead of at the point of entry.
The recent decision regarding Northern Ireland will provide British businesses with further frustrations from a VAT perspective. As it has been confirmed that there will be no ‘hard border’ between them and Ireland, Northern Ireland will not be subject to this extra cost as it will remain in the Single Market and Customs Union and therefore aligned with the EU from a regulatory perspective.
But if both sides continue to play hardball during negotiations as they currently are, then the EU will join the UK and VAT will be most likely be imposed in both directions. This would not only drive up costs significantly, but dramatically increase the opportunity for 13th VAT Directive claims, which non-EU countries currently use to claim back business expenses incurred in countries where they are not registered- provided they comply with the rules. It may in some instances be difficult for foreign business to fulfil these requirements in practice.
So, when this bill becomes law UK companies will need to find the money to pay import VAT on any product delivered from the 27 EU countries upfront, unless a new deferment strategy can be found in that time. If not, then EU countries will most likely impose VAT on imports from the UK to their own borders in return.
While the landscape is not clear, one thing certainly is: companies of all sizes need to start planning for the various VAT eventualities post the UK’s divorce from the UK.
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Not to do so could expose them to further cost at a time when every penny could matter.