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.
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.
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.
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.
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 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.