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Rethinking Tax: What is the Future for VAT in a Post-Brexit World?

Jan. 21, 2021, 8:00 AM

Many commentators will have raised a happy glass to the new Free Trade Agreement (FTA) between the U.K. and the EU that was so dramatically announced on Christmas Eve, 2020. The FTA, known formally as the Trade and Cooperation Agreement, covered a range of subjects, including the treatment of goods moving between the EU and U.K.

Like most indirect tax advisers, I took a more cautious view, muttering into my glass rather than raising it, and urging my clients to spend any free time that they had between Christmas and the New Year reviewing their European supply chains to make sure that they could continue trading into 2021.

The FTA is of course a very good thing and most welcome. The removal of the potential barrier of customs tariffs on many U.K.–EU movements of goods is extremely useful, but there is a real concern that some businesses, bruised and weary from Covid-19, will take unwarranted comfort in an agreement that could only ever be of limited help.

Challenges for U.K. Business

The difficulty for U.K. business is a more systemic one. In a post-Brexit world, it is no longer possible to simply load up stock on a van and drive it to a European customer. Inevitably, once the U.K. left the common market there would have to be some barriers, controls and tax consequences.

This means that regardless of the agreement on tariffs, goods being sent from the U.K. will require an export declaration and goods coming in from the EU would require an import declaration. On its own this is not too problematic; after all U.K. businesses send and receive goods from all over the world, but the scale of the movements being introduced overnight was always going to cause logistical issues—many of which have adorned the newspapers over the past few weeks.

Many of the carefully prepared plans that businesses put in place were immediately put under pressure, as the freight agents tried to deal with the exponential increase in demand from their customers. This has led to logistical issues, ranging from the inability to deliver consumer products without customers also receiving a demand for value-added tax (VAT)/duty at the doorstep, through to goods being seized and held in European ports, pending resolution of paperwork issues. The world’s largest retailer Amazon had already announced some time ago that any supplies made to it should be delivered duty paid and reminded direct sellers that its terms and conditions mean that all customers should also receive their goods with all taxes paid.

So, what are the remaining barriers and what can businesses do about them?

Customs Duties and Tariffs

When the FTA was announced, many people will have assumed that this removed the need to account for any customs tariffs on goods moving between the U.K. and the EU. Unfortunately, this is only partially true and is the case only where the goods moving originated in the U.K. or the EU respectively. Goods that were previously imported into the U.K. from elsewhere and then moved into the EU are still potentially subject to customs tariffs (and vice versa).

Even goods that are manufactured in the U.K. or the EU are not free from doubt, if they are comprised of components that were imported from overseas, and an often complicated judgment needs to be made on whether or not the goods qualify as U.K./EU origin. It also seems to be the case that goods leaving the EU can in some cases lose their origin completely. This means that if they are brought back into the EU without being changed enough to gain U.K. origin, then tariffs can apply on their re-importation.

Businesses will need to urgently understand how these rules apply to them, and create new processes to ensure that they can prove the origin of their goods and what they might need to provide to their customers to enable them to do the same.

Logistics and VAT

Perhaps the biggest issue is actually a logistical problem. Goods moving from the U.K. to the EU need to have an export declaration and an accompanying import declaration. The latter declares who the importer is and therefore who is liable to pay any VAT and duty.

If a U.K. business is going to import the goods into the EU and then make an onward sale they will be obliged to register for VAT and account for VAT on the sale. This can cause major issues if multiple countries are involved, as the business could be obliged to register in multiple countries. In addition it may not be completely simple to apply for a VAT registration, as this can take quite some time, especially at the moment when tax authorities are stretched.

There is also a hidden problem here, because in order for a business to be declared as the importer into the EU (or the exporter from the EU, for that matter) the business needs to be established in the EU or appoint a so-called indirect representative. This representative will be jointly and severally liable for any VAT/duty that needs to be paid.

Finding a business prepared to do this for a reasonable price can be difficult, and in some jurisdictions there simply is no market for the provision of this service and businesses have no option other than to become established, with all of the attendant tax issues. Similar rules apply in the U.K., and non-U.K. established businesses should consider the impact on them.

A VAT registration issue can also arise because U.K. businesses will no longer be able to access the EU simplifications for call off stock, triangulation or supply and install—this means that, for example, where a U.K. business buys stock from a company in Poland for direct delivery to its customer in Austria, it will be obliged to register for VAT in either Poland or Austria.

Other Changes

Most of the news headlines, however, relate to the business-to-consumer market, and it is understood that some of the copperplate solutions offered to such businesses are proving to be unworkable, or are being withdrawn by their providers.

This causes particular problems because of another set of changes that both the U.K. and the EU were due to implement from January 2021. The low-value consignment relief that enabled low-value goods to be imported VAT and duty free has been removed for all imports to the U.K. and instead import VAT is relieved on goods costing less than 135 pounds, the corollary being that importing businesses are now obliged to register for VAT in the U.K. and charge domestic U.K. VAT on the sale. If businesses sell through an online marketplace there are also changes which mean that the marketplace may need to account for this VAT, rather than the supplier.

Whilst this has caused confusion and dismay for some small retailers, pre-Brexit there was still a requirement to charge U.K. or EU VAT on most sales to consumers, to avoid putting domestic suppliers at a disadvantage, so this should be more an administrative issue than an unexpected new cost.

Whilst the U.K. rules did come in with effect from January 1, 2021, the identical measures due to be introduced by the EU have been delayed due to Covid-19, but should still apply (along with a new import Mini One Stop Shop registration covering all EU countries with effect from July 2021).

This does unfortunately mean that U.K. businesses selling business-to-consumer in the EU will have one set of rules applicable from January and another that may come into play in July, pending potential future delays.

Conclusion

These and all of the other changes brought about by Brexit are fundamental, far-reaching and cannot be dismissed as teething issues. It will be the businesses that are most adept at understanding and adapting to these changes that have most to gain in the new post-Brexit world.

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

Glyn Woodhouse is a VAT Partner at accountancy and business advisory firm BDO. Glyn has more than 25 years of experience in providing VAT advisory services, assisting clients in planning, advisory and dispute resolutions.

The author can be contacted at: glyn.woodhouse@bdo.co.uk

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