New changes outlined in the Taxation (Cross-border trade) Bill would see companies pay a levy on all goods imported from the European Union once Britain leaves the EU.
Presently, firms importing goods from other EU countries can register with HMRC for permission to transfer them free of charge. VAT is paid once the products have been sold, allowing companies to recoup the costs before paying.
Under the new legislation, import VAT is applied to all imports from outside the United Kingdom, with businesses being forced to pay the tax upfront. While firms can claim the VAT back at a later date, a significant amount of money would be spent before recouping them in sales.
Treasury Select Committee chair Nicky Morgan said she would write to HMRC to clarify what the changes would mean for businesses in Britain.
Business groups have responded to the proposed bill, saying it would create cash flow burdens for companies, in addition to increasing processing time at ports and border entry points.
“Retailers need to know how the government is going to deal with VAT. As it stands, there is a major risk VAT will be levied up front for good bought from the EU meaning a major change in cash flows, which, inevitably, will put further pressure on consumer prices,” said British Retail Consortium policy advisor William Bain.
“The government could resolve this by securing a deal between the UK and EU on VAT and through policy measures adopted by HMRC like self-assessment.”
Speaking to The Observer on Sunday, Labour MP Chris Leslie said he had tabled urgent amendments to ensure the nation would remain in the EU VAT area in an attempt to avoid causing more problems for businesses in the UK.
Last week, chancellor Philip Hammond declined to rule out the UK remaining in a customs union with the EU after the nation exits the union.