VAT is a Europe wide taxation system which we joined when we first became a member of the EEC and although it seemed a complicated tax to we non accountants, it quickly settled down and we are all familiar with it now. It also raises a lot of revenue, £120 billion in 2016-17. Brexit threatens to create VAT problems for exporters and importers to the EU. After Brexit, any company importing goods from an EU state will (absent any agreement to the contrary) will have to pay VAT upfront or the goods will not be allowed in. They will then be able to claim it back later in their own quarterly VAT return to HMRC. But this will tie up an awful lot of money for the businesses involved.
The government has promised to come up with something to help importers but have not yet published any details. This report (HERE) from BDO, a business and accountancy advisory firm, sets out the problem.
All transactions inside the EU are subject to VAT and all national VAT systems are very similar. From the BDO report for UK importers:
VAT on B2B arrivals of EU goods is accounted for under the ‘reverse charge’ procedure on the buyer’s VAT return, usually as a NIL net tax adjustment. However, after a hard Brexit, UK importers may face a liability to pay import VAT (at 20% for many goods) at the time that the goods enter the UK from the EU (unless and until HMRC introduce postponed accounting for import VAT, perhaps just for imports from the EU, via a UK trader’s UK VAT returns). This import VAT would not be recoverable until the UK importer submits its next monthly/quarterly VAT return form to HMRC – putting pressure on the UK importer’s cash flow and working capital and potentially leading to increased bank guarantee charges if they operate an import VAT/duty deferment account.
For exporters the position is even worse:
If the UK supplier is contractually responsible for delivering the goods direct to the EU customer (eg on ‘delivered duty paid’ shipping terms), it may also be required to clear the goods through EU Customs, thus having to pay import VAT (and potentially Customs Duty too, depending upon whether or not a post-Brexit customs union between the UK and the EU is agreed) at the VAT rate chargeable in the EU member state of entry.
This could also give rise to a potential liability for the UK supplier to register for VAT in one or more EU member states in order to recover the import VAT that it pays there, cash flow issues while waiting to recover the import VAT on a local VAT return (or by another claim mechanism), and a liability to account for (and invoice) local VAT on its supply of goods to its EU customer using local VAT rates, which may be different from those that apply in the UK.
Exporters from the EU may have to register for VAT in one country (the UK) while our exporters may have to do the same in up to 27 members of the EU. This was all set out in January this year in a Notice to Stakeholders (HERE) - they may even need to appoint and pay for a tax representative, section 2 bullet point 4:
A company established in the United Kingdom carrying out taxable transactions in a Member State of the EU may be required by that Member State to designate a tax representative as the person liable for payment of the VAT in accordance with the VAT Directive.
Note that exports to third countries (non EU) are VAT exempt so there will in future be scope to evade VAT on parcels from the EU. At present import VAT is not charged on goods valued at £15 or less but Customs have no way of determining if the goods are far more valuable - unless they inspect it. This doesn't happen very much now from third countries into the UK so customs simply do not have the capacity to inspect the great bulk of goods coming into the country as a parcel, by air or road freight.
A company established in the United Kingdom carrying out taxable transactions in a Member State of the EU may be required by that Member State to designate a tax representative as the person liable for payment of the VAT in accordance with the VAT Directive.
Note that exports to third countries (non EU) are VAT exempt so there will in future be scope to evade VAT on parcels from the EU. At present import VAT is not charged on goods valued at £15 or less but Customs have no way of determining if the goods are far more valuable - unless they inspect it. This doesn't happen very much now from third countries into the UK so customs simply do not have the capacity to inspect the great bulk of goods coming into the country as a parcel, by air or road freight.
We could choose to remain in the EU VAT system but this is ultimately overseen by the ECJ so I assume it will be rejected. Outside of the EU, we will be unable to access their VAT database which will stop the exchange of information and this will only help the fraudsters. HMRC estimated it was unable to collect over £12 billion in VAT in 2015-16 and Brexit will surely increase this figure even more.
The Express some time ago even reported (HERE) we could scrap VAT after Brexit, quoting the Chair of the Treasury Select Committee (and staunch remainer) Nicky Morgan. So, that's a new tax system, immigration system, agricultural policy, fisheries policy, trade policy, ...........
