INSIGHT: VAT in the Time of Brexit

Once again, a no-deal Brexit looms large on the collective horizon as Brexit talks stall and are fraught with recriminations within the media spotlight. A no-deal Brexit—the oft-reported phenomenon that has struck our consciousness with its myriad implications and even greater range of unknowns, has very different connotations now to those that which it had in 2019.

Throughout 2019, a no-deal meant no transition period whereas a deal meant the status quo was maintained, a situation where we find ourselves today. Yet as we approach the final stretch of negotiations, widely touted to be strained with both sides citing the other’s lack of flexibility and/or genuine interest in the talks, and impacted in no small measure by the viral implications of recent months, no deal means no trade agreement and means the U.K. will no longer be in the single market and the customs union. However, a deal also means the U.K. is likely to no longer be in the single market or the customs union.

The political implications of a sharp rift with the EU are, to no small degree, anyone’s guess. From a VAT perspective there are more tangible implications to grasp—and with them a host of necessary preparations. Business and tax authorities alike may find the final third of 2020 one of intensive paperwork, administrative headaches and a fundamental lack of certainty. This, combined with the economic havoc wreaked by the global pandemic even among the strongest of economies, makes for a complicated picture. The terms of our exit will be determined by the possibility of securing a Free Trade Agreement (FTA)—and indeed the political interest in doing so.

The current approach on Brexit between both parties makes it likely that neither certainty nor decisions will be achieved until the last minute. But the lack of an FTA could spell disaster for many businesses—a recent webinar polling by my company, Accordance, found that despite 55% of businesses believing that the absence of an agreement would cause significant issues and incur extra costs, a quarter of businesses have no Brexit planning underway at all. This absence of preparation for the coming upheaval should ring alarm bells on both sides of the channel, particularly as significant changes loom large with or without a deal.

It is hard to emphasize sufficiently how significant the changes from January 1, 2021 will be, and the ways in which its tendrils will extend into almost every area of business functioning. From imports and exports replacing dispatches and acquisitions, to enhanced liability to register in EU member states, to the need for fiscal representation, to recovery taking place via paper-based systems, the implications of the coming months are seismic.

Moving Goods, Moving Goalposts

Take, as an example, the movement of goods between the U.K. and EU. The history behind this is long and somewhat convoluted. Casting our minds back to February 2019, the U.K. government introduced simplifications to ease the potential impact of a hard Brexit. These included Transitional Simplified Procedures (TSP) in respect of customs entry into the U.K., whose intention was to reduce burdens on businesses.

The government also announced postponed accounting for import VAT would be introduced, allowing VAT to be accounted for at the time of VAT return rather than import. These measures were abandoned in February 2020 after the transition deal had been agreed. The removal of postponed accounting for import VAT was particularly controversial, and indeed was later reintroduced in the March budget. Best laid plans around the world have been upended by the Covid-19 crisis, and the U.K. government appears to have altered its view of border controls in light of the pandemic and business lobbying. In June, a phased implementation in three stages for border controls was in introduced, taking into account both the impact of the pandemic and the capacity of the government itself.

The first stage will go live in January 2021 and will introduce basic customs requirements such as sufficient records for the import of standard goods. In line with TSP, there will be up to six months to complete customs declarations. Any duty payable will be on submission of customs declaration, not at the time of entry—this itself has similarities with postponed accounting.

The second stage will take effect as of April 2021 and will require pre-notification and health documentation of all products of animal origin (POAO) and all regulated plants and plant products. In the third and final stage, due to come into force in July 2021, businesses moving all goods will have to make declarations at the point of importation and any customs duty will be due at this time.

As of stage one, controlled goods like alcohol and tobacco will be subject to checks and the new UK Global Tariff lists (UKGT) published by the government will apply in those instances in which there is no preferential agreement with the exporting country. The UKGT is in effect a worst-case scenario document, showing the tariffs that will apply in the event that there is no FTA. It is interesting to see how these lists contrast to the 2019 temporary tariff publication. In the latter, 88% of goods were tariff free, whilst the new UKGT reduces the level to 60%.

Mechanism Headaches

Would that the cost of import be the only consideration. When it comes to value-added tax (VAT) reporting mechanisms and requirements abound. Among these, Customs Freight Simplified Procedures (CFSP) and Entry In Declarants Records (EIDR) are likely to be available without application until June 30, 2021 but require approval following this period. CFSP is an existing electronic customs declaration system for speedy customs clearance. The key point is that this will only apply on imports from the EU to Great Britain—there will be a different position for Northern Ireland as a result of the NI Protocol, with further complexity arising with trade between Great Britain and Northern Ireland (NI) in a no deal scenario where goods are at risk of moving to the EU/U.K. as part of that trade, with the EU Commission recently proposing NI business having a special VAT ID number.

A small lifeline thrown to business manifests in the form of Postponed VAT Accounting, due to be introduced by HM Revenue & Customs (HMRC) on January 1, 2021. It will apply to all imports, not just those from the EU. There will be no application required, and accounting for import VAT will be due on the VAT return. However, payment will still be required for duties, which will be applicable in line with the UKGT list.

An area in which greater relief was expected and has not been delivered is Intrastat, the mechanism which provides trade statistics for EU–U.K. trade. Intrastat is admin-heavy and widely recognized as a headache for businesses. A silver lining to Brexit proceedings for many was the imagined cessation of Intrastat obligations post-January 2021. However, this silver lining was quick to dissipate as HMRC made clear in October 2019 that U.K. businesses would be required to continue submitting Instrastat. The reasons why are unclear, as are the specific obligations required in ongoing reporting.

A Light at the End of the Tunnel?

The picture for importing into the EU is beset with its own issues. As of January 2021, the U.K. will be treated in the same way as any other third country and will be liable for customs declarations for imports into the EU. The specific responsibility will depend largely on incoterms and contractual arrangements.

However, a flickering light in the tunnel can be seen in one or two areas. Firstly, since member states will be receiving full customs declarations, it is very unlikely that EU-GB trade will require Intrastat declarations. Secondly, the mechanism for postponed import VAT accounting offered by many EU member states may throw cash flow and administrative burdens a lifeline. However, each member state has varying conditions for postponed import VAT accounting and it may require an application and may not be available to all businesses. Some nations have a favorable position on importing with regards VAT, and businesses now find themselves standing on the precipice of a major review of supply chains, conditions and application processes in numerous nations. In many instances it is likely that smart supply chain rerouting and well calculated VAT registrations could save significant sums.

In summary, though the specifics of the post-January panorama are still unclear, it is inevitable that great change is coming. Businesses on both sides of the channel have much to do to prepare, while the next several months’ development is at best anyone’s guess, businesses would do best to adhere to the age old maxim: hope for the best, prepare for the worst.

Alex Smith is VAT Director at Accordance, U.K.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.