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Brexit: the tax consequences (Pt. 2)

Welcome to the second part of our mini blog series on the potential tax consequences of Brexit. This time, Helen looks specifically at VAT, Import duties and Import VAT and The Single Market.

Read the first part of this blog here.

VAT

Although EU Directives and EU case law mean that VAT has become one of the key European taxes, this tax is unlikely to change dramatically in the short term particularly as it is the main tax raiser for the UK. 

Depending on the outcome of Brexit negotiations, exporters currently selling to other EU member states are likely to be affected. 

For VAT and customs purposes “exports” mean goods that are transferred outside the EU, whilst “dispatches” describe goods sold within the EU. 

If a UK business sells goods to a VAT registered customer in another EU member state then the rate of UK VAT is zero.  At present, VAT is accounted for by the customer in the destination country at the rate in force in that country.

Assuming the UK leaves the EU, all goods transferred abroad from the UK will become exports.  When considering B2B sales, this will generally have no impact on the UK VAT rate as exports are also zero-rated. 

The biggest impact is likely to be compliance with export procedures, and the onus will be on the seller to make electronic export declarations via HMRC’s Customs Handling of Import and Export Freight systems.  Depending on the type of goods exported, special licences may be required together with payment of the appropriate levies. For those “exporting” for the first time, it is vital that they know what is expected of them, including any advance registrations, to avoid any disruptions to the supply chain.

In the longer term, there may be VAT benefits of Brexit, particularly with the setting of VAT rates.  The extension of zero-rating VAT (a rate not in existence anywhere else in the EU) would be possible without the restrictions of EU legislation. It also may mean that VAT could become more political as different VAT rates could be used as incentives or disincentives without regard to EU law.

Import duties and Import VAT

One of the financial impacts of Brexit on UK importers could be customs duties payable on goods provided by EU member states, although it remains to be seen whether these will be reduced to nil through free trade agreements.

Import VAT could become payable on goods leaving the UK and entering EU members states.  This duty is normally payable on the value of goods on entry into a territory, but it does not apply to intra-EU community supplies.  Whether this will directly affect UK exporters depends on who is acting as importer of the goods sold.  Often this will be the customer, for orders placed by large businesses, but it is unlikely to be the case where customers are individual consumers. If consumers in the EU need to pay import VAT, UK goods may become less attractive as a result.

For UK businesses importing goods into the EU, it may become necessary to register for VAT in the country or countries of destination depending on the domestic law of those countries.  This may result in multiple VAT registrations in different EU member states.  Importers of goods from the EU will correspondingly need to pay VAT on importation to the UK. Cash flow disadvantages could therefore arise with import VAT being payable at the borders, but not being reclaimable until a VAT return is filed some months later.

It is possible to use an agent, such as a courier, to act as importer and take care of import VAT and duties, but there will be a cost attached to this service, which will either increase selling prices, or reduce profits if the cost is absorbed by the exporter.

Leaving the EU’s Customs Union will no doubt give rise to barriers as all goods will need to be cleared by customs, resulting in additional time, complexity and cost to businesses.

The Single Market

Whether or not the UK will remain participators of the Single Market is yet to be seen.  Norway trades in the Single Market, despite not being a member of the EU, and participates in the free movement of goods, services, capital and people through an EEA agreement.

If the EU and the UK agree similar terms, this will inevitably come at a cost and perhaps under the same “freedom of movement” principles, together with a requirement for the UK to comply with certain EU laws. To that extent it might be argued that little will change except that the UK would be unable to influence the EU laws it will have to adhere to.

Going forward

We'll be posting frequent blog posts and articles to provide you with our thoughts as to the potential impact of Brexit on you, your business and your family so keep your eyes peeled.

In the meantime, if you have any queries, please do not hesitate to get in touch and we will do our best to help you.


All content is for general guidance only. It provides an outline, and may not include points which are important in your case. You should not rely on this blog without taking individual advice based on the full facts of your case. The information given was correct at the time of publication.


 

 

15 Jul 16
Helen Cowley