VAT rules if there is no Brexit deal

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Jeremy Cape and Dickie Chan of Squire Patton Boggs discuss the proposed VAT rules which will apply if the UK leaves the EU on 29 March 2019, without a deal on trade or other laws and regulations.

No deal scenario 

HMRC has published guidance entitled VAT for businesses if there’s no Brexit deal. This guidance is at pains to point out that a scenario of the UK leaving the EU without an agreement "remains unlikely".

We still await more clarity on the government's desired position on VAT if there is a deal. If, as expected, the UK leaves the EU VAT area under a negotiated deal, it may not be dissimilar to the no-deal position.

The UK as a third country

Little in the guidance should come as a major surprise. Much of the guidance simply states the consequences for any country of being outside the EU VAT area.

The government has said that in the event of a no-deal Brexit it will introduce "postponed accounting for import VAT". In the words of the guidance: "this means that UK VAT-registered businesses importing goods to the UK will be able to account for import VAT on their VAT return, rather than paying import VAT on or soon after the time that the goods arrive at the UK border". Many had predicted that this would happen, partly to minimise the need for infrastructure at the Irish and French borders.

All imports affected

What fewer predicted is that the government would go further and apply postponed accounting for all imports, not just those from the EU27 member states.

As Sir Humphrey would have said: “this is a courageous decision”.

The government is saying that traditional import VAT (ie collecting VAT at the point the goods enter the VAT area) is not necessary in a VAT system. There are issues in respect of the increased opportunity for fraudulent behaviour. For example, how does the border agent check that the VAT registration number is valid?

Why postponed accounting?

It may be that the government feels constrained by WTO rules from differentiating between the EU27 member states and the rest of the world in applying postponed accounting. It’s not certain that this would be the case.

The government’s overall position on postponed accounting may well not be driven by a desire to avoid traders having to fund import VAT on goods purchased from the EU27 (although it has gone down well in the business community), but a belated realisation that VAT is capable of gumming up the borders to an unacceptable degree. Postponed accounting doesn’t get rid of a VAT border, but does soften it.

Parcels subject to VAT

In the event of no deal, the government is also abolishing Low Value Consignment Relief (LVCR), not just for imports from the EU27, but worldwide. This means that goods entering the UK as parcels sent by overseas businesses will be liable for VAT, unless the items shipped are already exempt or zero rated.

The guidance explains that: “for parcels valued up to and including £135, a technology-based solution will allow VAT to be collected from the overseas business selling the goods into the UK. Overseas businesses will charge VAT at the point of purchase and will be expected to register with an HM Revenue & Customs (HMRC) digital service and account for VAT due.”

Other commentators have already noted wryly that "technology-based solutions", particularly those not backed up by detail, are not renowned for their ease of implementation. Even if such a solution exists, there may be challenges in getting overseas businesses to register for UK VAT, understand UK VAT, charge UK VAT or even regard it as constitutional in their home country. What if such a business, having charged VAT, does not then pay it over to HMRC?

EC sales lists

UK businesses selling goods would not need to complete EC sales lists, but they will need to retain evidence to prove that goods have left the UK.

The guidance reminds us that: "UK businesses should check the relevant import VAT rules in the EU Member State concerned." Essentially whatever the UK does, the EU27 is likely to treat imports from the UK in the same way as from any other third country.

Finance sector

In theory, a no-deal Brexit could lead to enhanced VAT recovery by certain financial institutions. The guidance says "For UK businesses supplying insurance and financial services, if the UK leaves the EU without an agreement, input VAT deduction rules for financial services supplied to the EU may be changed. We will update businesses with more information in due course" It appears that a change in the law would be forthcoming.

There is no suggestion that this will change where the bank’s customer is based outside the UK or EU27. This is a different approach to elsewhere in the guidance, where changes are generally to apply to all countries other than the UK.

VAT MOSS

There is also a reminder for digital businesses to register for the VAT MOSS non-Union scheme in an EU Member State after the date the UK leaves the EU.

No more TOMS

The government will be working with the travel industry to minimise the impact of the disappearance in the UK of the EU Tour Operators' Margin Scheme.

Irish border

The Irish border is currently invisible. It has no barriers as required by the Good Friday Agreement, (also known as the Belfast Agreement). But once the UK leaves the EU, the Northern Irish border will form the edge of the EU area. 

The guidance says "The UK would stand ready to engage constructively to meet our commitments and act in the best interests of the people of Northern Ireland, recognising the very significant challenges that the lack of a UK-EU legal agreement would pose in this unique and highly sensitive context". The government still appears to be grasping for a solution to what continues to be a seemingly insurmountable problem.

Conclusion

In a no-deal scenario, the UK will unilaterally make changes to its VAT system so that businesses do not have to fund import VAT, which is likely to cause increased fraud, and we are still clueless about how VAT will work on the Irish border.

Seven months to go!

About Jeremy Cape

Jeremy cape

Jeremy Cape is a tax and public policy partner in the London office of Squire Patton Boggs, advising on a wide range of issues, including M&A, private equity, finance, restructuring and insolvency, and VAT. He is a member of the legal advisory panel of the Red Tape Initiative, which will identify the most important, least controversial opportunities for cutting red tape in a post-Brexit world. He can be followed on twitter @jeremydcape.

Replies

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25th Aug 2018 16:07

Did the Government not have all this sorted and ready to go prior to the referendum?

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to lionofludesch
27th Aug 2018 18:22

Fairly obvious why it rightly didn't. Carts and horses spring to mind.

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to tonycourt
27th Aug 2018 18:38

tonycourt wrote:

Fairly obvious why it rightly didn't.

Not really.

The outcome wasn't obvious so you'd need to plan for both possible results.

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to lionofludesch
27th Aug 2018 18:57

I stand corrected. Amend to "obvious to many of us".

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to lionofludesch
29th Aug 2018 10:41

It is clear that no planning was done for a "leave" result of the EU referendum. Whats more the civil service were forbidden from doing any such planning.

I was in a meeting with HMRC officals the day before the vote - to discuss MTD - and specifically asked them what would be the effect on the project of a leave vote. They said they had not been allowed to consider that option.

I heard the same story from another civil servant who had been working in HM treasury at the time of the vote. She confirmed that no planning work on a leave outcome had been authorised. The Govt was so confident of winning a remain result that it was seen as a waste of resources to plan otherwise.

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to Rebecca Cave
29th Aug 2018 10:56

Rebecca Cave wrote:
The Govt was so confident of winning a remain result .............

I think we all gathered that.

But thanks for confirming.

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26th Aug 2018 21:41

When Cameron called the referendum there was no plan.
The problem we have is never has the quality of politicians been so low. May's proposal at this late hour is to keep us " half in " and " half out". Batnier will not entertain this type of deal and even if he did the British people would go wild. The Labour party is as bad as the Tory party wanting cake and eat it.
I voted to leave but now worry about the isolation and further break up of the Union. We live in dodgy times and we seem to blame everything on the immigrants. These people work and toil where we would not.
It's a crazy uncertain world.
The private sector has seen so many failings - poor and negligent capitalism and no party has a clue where the money is coming from to reduce the fiscal deficit.

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to Mrbailey
28th Aug 2018 12:45

"I voted to leave but now worry about the isolation and further break up of the Union."

Bit late to turn your brain on then! The potential breakup of the UK (and Ireland will go IMO if there i a border) was dubbed part of "Project fear" at the time as Frage et al were pretending there would be more money for the NHS and also pretending we could get free trade without following the rules and without freedom of movement of labour, which was always a complete fantasy.

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By DJKL
to ireallyshouldknowthisbut
28th Aug 2018 16:57

I actually think that perversely, on economic grounds, the worse Brexit turns out to be re border frictions the less chance of Scotland leaving the UK (if a rational player).

Whilst Scottish "Exports" to rUK are not an exact science, the Office of Nat Statistics do take a stab, it looks like over 25% of its GDP is cross border goods and services with rUK (excluding oil, gas and goods that then go elsewhere with no value added), in fact its EU exports are much smaller than its rUK and ROW.

If Ireland becomes a disaster due to trade issues then in event of a harder Brexit , and the UK being adrift from EU, Scotland might certainly consider rUK as far more important than EU membership solely on economic grounds.

https://www.gov.scot/Topics/Statistics/Browse/Economy/Exports/ESSPublica...

See the links on above page if you want to consider them in more detail and the inherent assumptions within. Given Scotland to rUK is not a trade border the basis of compilation does need considered- my own gut view is they are possibly roughly accurate but to paraphrase the notes, a little care is needed re treating them as gospel.

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to DJKL
28th Aug 2018 17:38

I read very recently that 66% of Northern Ireland's exports are to the Republic.

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to lionofludesch
28th Aug 2018 18:01

I assume Ireland will be united inside of 10 years if we fall out of the EU, but Scotland will probably remain in the union for the exact same reasons albeit with lots of whistling about leaving.

Whether Ireland being united is a positive or negative is another question entirely. The risk of renewed violence is very real but if this can be avoided then at least that is something good coming out of Brexit.

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to ireallyshouldknowthisbut
28th Aug 2018 18:18

ireallyshouldknowthisbut wrote:

I assume Ireland will be united inside of 10 years if we fall out of the EU....

Why on earth would the Dáil want to take on Northern Ireland ?

What's in it for them ?

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By cfield
to ireallyshouldknowthisbut
29th Aug 2018 18:56

You're only thinking of the economics, not the politicals. The Unionists would never allow it, even if the NI economy suffered as a result.

Personally I would be inclined to do absolutely nothing with the Irish border. If the Republic decide to impose border controls on their side at the behest of Brussels, that's up to them. It will hurt them more than it does us.

Eventually both sides will realise this and we will end up with what amounts to a de facto free trade deal between Britain and Ireland. The EU will just have to lump it. I mean, what are they going to do, expel Ireland?

It may indeed drive a huge coach and horses through the cherished integrity of the Single Market, but life will go on. The sky will not fall in.

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By DJKL
to lionofludesch
28th Aug 2018 18:09

I can believe it, per my link above Scotland to rUK is 61% of all "exports" (Gds and Serv), what is more alarming is how significant all "exports" (To ROW and rUK) are re GDP, re Scotland not that far short of 50% if we estimate Scottish GDP at say £160bn and "exports" are the given 75.6bn which do not include oil and gas though does include services re these industries)

Whilst exports (serv/gds) re Uk Brexit are important they shrink in significance when comparing how important "exports" are to say NI and Scotland .

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28th Aug 2018 10:11

Yippee. No more EC sales lists. One or two other minor issues to sort. About time the EU made some attempt to deal with them. Would the Irish like to join the UK Vat area?

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29th Aug 2018 10:07

Every solution has a problem seems to be the mantra with Brexit.

My reading is that VAT rules apply the same as when we import from the rest of the world. And for the remainers, yes there is more to the world than the EU.

Oh I did not vote, not allowed, but would probably have gone for remain as essentially being a bit lazy it would have been the easiest choice.

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29th Aug 2018 10:38

There is an easy solution to the Irish border problem- we'll put no border up on our side, and the EU can decide what it wants to do on it's side. We'll apply VAT as we do now to non-EU items and take the opportunity to modernise VAT collection and employ some more people to ensure compliance.

Not having to fund import VAT straight away will help many businesses- fraud can be tackled by having more staff and checks and a modern system.

The whole attitude of Remainers is to denigrate, nay say and generally be as negative as possible, as that is a lot easier than looking for opportunities and working out solutions.

I wonder how many apply the same thought processes when dealing with their clients? It's little wonder that Brits are known worldwide as moaners and complainers offering little in the way of positive solutions to problems they encounter.

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to Ian McTernan CTA
29th Aug 2018 10:44

Ian McTernan CTA wrote:

There is an easy solution to the Irish border problem- we'll put no border up on our side, and the EU can decide what it wants to do on its side.

Easy for everyone except those exporting 66% of Northern Ireland's exports to the Republic.

Depending on what the EU decide .......

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By vstrad
to lionofludesch
29th Aug 2018 11:05

Every trade is beneficial to both parties, otherwise it wouldn't happen. Hence the Republic needs those imports from the North just as much as the North desires to make exports to the South.
The EU (rightly) criticizes Trump's tariffs but remains strangely unaware of its hypocrisy on the issue, given the extensive tariff barriers it puts up to the RoW. Making your imports more expensive than they need be is an act of economic masochism yet that is what the Commission is telling Ireland (and the rest of the 27) it will have to do.

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to vstrad
31st Aug 2018 12:46

vstrad wrote:

Every trade is beneficial to both parties, otherwise it wouldn't happen. Hence the Republic needs those imports from the North just as much as the North desires to make exports to the South.

Fair point.

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By satprof
to Ian McTernan CTA
29th Aug 2018 15:26

... & you think that these moaners and complainers are going to take on the world? The only way that that will happen will be a near-continuous devaluation of Sterling.

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to satprof
29th Aug 2018 15:37

satprof wrote:
The only way that that will happen will be a near-continuous devaluation of Sterling.

No change there then.

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By NeilW
29th Aug 2018 10:42

"It has no barriers as required by the Good Friday Agreement, (also known as the Belfast Agreement)."

There is no such requirement, either in UK law, nor in any enforceable international treaty (the Belfast Agreement is not judicable in any International court).

Don't believe everything you read.

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29th Aug 2018 12:35

In short, everything is still very much up in the air with just 7 months to go.

Our politicians beggar belief. They couldn't run the proverbial in a brewery.

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29th Aug 2018 14:19

Sadly, I'm old enough to well remember when Traitor Heath first imposed VAT and whittered on about how it was to replace the extant system of Purchase Tax PT).

He - fallaciously - described PT as a complex and dated tax and how VAT would be "One simple tax at a very low rate" and all the other mythical benefits.

Heath, naturally, forget to tell us VAT was an EEC (Now EU) tax and he was compelled to impose it as a condition for acceding to the Treaty of Rome.

He also ignored to inform the electorate how a large proportion of VAT collected would go straight to the EEC/EU coffers!

This mythical "Simple tax at one low rate" has now, of course, become another weapon in the UK Government's rapacious cash collecting armory, to try and assist Government's profligate waste and unfettered over complication of tax codes.

Low rate? I bloody wish!

One simple rate? Again, I wish.

Many of the immense complications have been imposed by EU LAW: and added, significantly to agents' knowledge base demands and the long suffering tax burden.

Once free of the horrendous EU tax and spend Ivory Towers and determination to bankrupt every member state (Except Germany, of course), then there is no longer any justification to retain the crippling VAT mechanism and burden.

A simple Sales Tax, like the USA, would suffice.

I can, however see this logical and intelligent step happening as I see squadrons of Pink Pigs carrying out aerobatics each morning outside my office windows!

Since Government are as addicted to debt and profligacy as are heroin addicts and their needles and crime to support their out-of-control habits.

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to Michael C Feltham
29th Aug 2018 14:26

Michael C Feltham wrote:
I can, however see this logical and intelligent step happening as I see squadrons of Pink Pigs carrying out aerobatics each morning outside my office windows!

The Flying Pig certainly wasn't airborne at Wembley last Saturday.

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By RogerMT
to lionofludesch
06th Sep 2018 09:54

Dominic Raab is an anagram of Mid Air Bacon. :)

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to Michael C Feltham
29th Aug 2018 14:53

That's the ticket! Never let the truth get in the way of a good story.

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31st Aug 2018 12:34

Good post

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31st Aug 2018 16:07

"The guidance explains that for parcels valued up to and including £135, a technology-based solution will allow VAT to be collected from the overseas business selling the goods into the UK. Overseas businesses will charge VAT at the point of purchase and will be expected to register with an HM Revenue & Customs (HMRC) digital service and account for VAT due."

Oh my word, does HMRC really think that will work?
I buy stuff for model railways and our boat from abroad, principally from Australia and the USA, often in consignments below £135. I also buy electronic bits from Hong Kong occasionally. I can tell you that my suppliers absolutely will not register for UK VAT and put themselves in a position where they will have to calculate VAT, send information to HMRC, and pay the cost of international payments to remit VAT. They will scoff at the idea. They will either ignore the rules (and how will HMRC enforce them?), or stop supplying, or demand that I provide a consolidator to accept and forward the parcels and deal with the VAT. That would be a very expensive service, you could not run it on a shoestring. I certainly could not justify paying an extra cost of that sort.

The more I think about this idea the more mad it seems. Bonkers. Absolutely nuts.

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12th Sep 2018 12:43

ooohhh my gosh, lets hope we get a deal, I think we will but only a week or so after the deadline.

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to AndrewV12
18th Sep 2018 09:37

What sort of deal could possibly be worth £39bn?

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