Technical
Peter Bartram 5 Oct 2017 10:30am

VAT after Brexit

Peter Bartram models the possible shape of VAT in a post-Europe Britain, and reports on what businesses can do to mitigate the impact of change

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Caption: Illustration by James Olstein

Paris-based chartered accountant Stephen Dale has a front-row seat when it comes to witnessing the impact of Brexit on VAT. Dale is a partner at PwC Société d’Avocats and has witnessed the germination of the toing and froing that Britain’s departure from the EU will entail.

He has, for example, come across a UK business renting warehouse space in northern France as a prelude to starting a French subsidiary. “It wants to continue to benefit from the VAT distance selling rules which, under the Brexit scenarios we know so far, would no longer be available to it selling directly from the UK,” he says.

But the traffic may not be only one way. Though not specifically VAT-related, one French business indicated at a recent seminar Dale attended that it may move production to the UK from France, following the sterling slump since the EU referendum.

There will be big changes for VAT once Britain leaves the EU. Few believe that it will be mostly good news. If there is a hard Brexit, VAT-registered providers of goods could experience extra costs, says Robert Facer, VAT director at Menzies.

There will be no VAT-free trading area with the other 27 EU countries and possibly customs duties to pay as goods move between Britain and the EU. Facer is not the only accounting professional concerned about the impact of a new customs frontier, complete with increased paperwork, delays and extra admin, which Brexit could impose.

BARRIERS TO TRADE

Nor is the freedom to develop VAT free of EU directives and away from the beady eye of the European Court of Justice quite the unalloyed benefit some have made out. If Britain goes its own way on VAT after an EU exit, that may create additional barriers with the 27 remaining EU members, notes Nick McChesney, chairman of ICAEW’s VAT and Duties sub-committee and a partner at PKF Littlejohn.

For accountants facing the challenge, it’s not as though they don’t have anything else to bother about in the sphere of tax changes. There is the OECD’s BEPS project for harmonising international tax rules; the UK’s own (already delayed) Making Tax Digital programme; not to mention newish real-time reporting arrangements in countries including Spain, Italy, Poland and Hungary. There are new or revised VAT regimes coming down the track in China, India and the Gulf States.

All of these, like post-Brexit VAT, are likely to require serious systems changes points out Brad Ashton, VAT partner at RSM. There could be big changes for the VAT treatment of goods, perhaps not so much for services. So, depending on what the eventual outcome of the negotiations is, goods first. “Trading goods within the EU will become more expensive as there will be additional administrative requirements,” says Kamlesh Chauhan, senior VAT manager at mid-tier accountants haysmacintyre. Trading goods between Britain and the EU could start to resemble the UK’s current arrangements with other countries.

If Britain loses free-trade access to the EU, it will also lose free-trade access to countries with which the EU and European Economic Area has negotiated trade treaties. In that position, Britain could find itself using the World Trade Organisation’s most-favoured nation rules, under which import duty rates tend to be higher. And that could have a big impact on how much import VAT companies must pay – as VAT is calculated on the duty-inclusive value of the imports.

Of course, the VAT can be reclaimed on the quarterly VAT return but, in the meantime, the business takes a hit to its cashflow. “The likelihood is that business would need to fund the additional VAT costs either by way of a revolving credit facility or by utilising import VAT deferment reliefs,” says Louise Scholey, associate director at Grant Thornton UK. But, she adds, deferment reliefs often require bank or insurance-backed guarantees, which can be costly to secure.

The problem would be overcome if HMRC introduced self-accounting for import VAT similar to the current system used for imports from EU countries. But nobody yet knows whether that will happen because nobody knows what the final trading relationship with the EU will look like.

For services, the problems don’t seem to be so challenging at this stage – but, again, nobody can be certain. According to most informed opinion, the current self-accounting rules for VAT on services bought from the EU will remain broadly the same. And there could be a bonus: it may be administratively easier to supply services to EU countries because EC Sales List declarations may no longer need to be completed.

Don’t expect massive changes to VAT law and regulations on the day Britain steps outside the EU. Most elements of the EU VAT Directive will be incorporated into UK VAT law. But David McDonnell, VAT director at MHA MacIntyre Hudson, cautions: “It is always possible that a headline-grabbing reduction in the VAT rate for a particular product or service may be implemented quickly.” Keep an eye on women’s sanitary products and children’s car seats, a previous obsession of Brexit-obsessed tabloids.

EXPAND HORIZONS

The bigger question is how exit from the EU may expand the horizons of the current Office of Tax Simplification review of VAT. “The lowering of the tax threshold, which is one of the highest in the world, is high up the agenda,” argues James Hurst, indirect tax partner at Mazars. “Also being discussed is the widening of the zero-rate band – currently prevented by EU law – as well as simplifying the ‘partial exemption’ and ‘option to tax’ rules, and widening the refund system to include all charities.”

However, the hopes of those who thought Brexit would mean “taking back control” may be dashed when it comes to VAT. Past decisions of the European Court of Justice will most likely continue to have a powerful influence on the way VAT law is interpreted in the UK. And, if the government achieves its aim for the UK to develop a deep trading relationship with the EU, that may come at the price of keeping UK VAT largely in lock-step with Europe.

Stephen Dale suggests companies need to look at the flow of goods into and out of the UK. “The first step is to identify them all,” he says. That includes not just goods shipped from the UK but also the origin of the goods shipped. “Some businesses have had some surprises when they realised their supply chains were not as they thought,” Dale notes.

McChesney adds a warning about the worst-case scenario: “If you move goods or services across borders, a working assumption is that there will be a customs frontier and a need to declare these by way of a Customs entry.” But he also notes that businesses in areas such as financial services or tour operators may face a number of industry-specific VAT issues.

Clearly, reliable decisions on post-Brexit VAT need to be taken on the basis of calculations that are as accurate and realistic as possible. “Some firms are undertaking calculations in-house while others are using data analytics to understand the potential costs of Brexit under a number of possible outcomes to the trade negotiations,” says Scholey.

And it will pay to think ahead. For example, HMRC could introduce restrictions which limit some VAT and duty reliefs to companies that have achieved a recognised high-compliance threshold, like Authorised Economic Operator (AEO) status, Scholey suggests. She says some of her clients have already started on the AEO approval process to be ready – just in case. But there are other admin-easy reliefs that companies can plug into now – such as import VAT deferral and simplified import VAT accounting (SIVA).

“Many clients have set up internal Brexit working parties or steering groups,” Scholey explains. “They are keen to understand the potential increased cost implications – such as absolute duty costs and VAT cashflow costs – and the extent of any administrative costs as the number of import and export declarations increases.”

Talk around the business world never takes long to come around to the number one worry – uncertainty. Nobody knows what will happen. Brexit is like jumping off a cliff in a thick fog. Nobody knows where the bottom is. The only thing everyone can be sure of is that, as far as VAT is concerned, there will be more work and more costs.

For content on the business impact of Brexit visit icaew.com/en/technical/economy/brexit or economia.icaew.com/en/features/the-eu-referendum


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