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Brexit - Where are we as regards to VAT?

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Summary: The UK is due to leave the EU on 29 March 2019. This article gives a broad summary of the issues, discusses recent developments and summarises some of the implications for businesses.

Key issues

  • Trade: The key business concern is the potential failure to agree a trade deal on preferential terms with the EU for goods and services. Failure to conclude an agreement may mean extra costs and administrative burdens that might well make UK businesses uncompetitive.
  • Immigration: The UK would like to put an end to the free movement of labour and reduce migration numbers from the EU.
  • Security: Currently, the UK has access to the European Arrest Warrant process, Europol and the Second Generation Schengen Information System. The key question is how this information sharing could be sustained after Brexit.
  • Northern Ireland: Both the EU and the UK are keen to avoid a “hard border” between the Republic of Ireland and Northern Ireland. However, the UK is unwilling to accept a customs border between Northern Ireland and Great Britain. The challenge is to find a solution which allows people and goods to move between the two territories, without establishing a physical border.

A transitional period?

  • Subject to the terms of the Withdrawal Agreement, there will be a transitional period during which EU law will continue to apply in the UK. This will continue until 31 December 2020.
  • However, if the UK and EU fail to strike a deal, there will not be a transitional period, meaning that the UK would, immediately after Brexit, be forced to trade with the EU under WTO rules.

The current UK proposals and recent developments in relation to VAT and customs

  • In July 2018, the government published its proposal for future legislation on the future customs relationship between the UK and the EU. At the same time, the draft legislation has been making its way through the UK parliament.
  • Under these proposals:
    • The UK would be in a free trade area with the EU for goods only, i.e. there would not be any tariffs on goods passing between the UK and the EU, thereby eliminating the need for border checks on goods.
    • The UK would collect tariffs on behalf of the EU as part of what is known as a “facilitated customs arrangement”, as long as the EU does the same for the UK.
    • The UK could not join the EU VAT regime.
    • The UK will have the regulatory freedom to decide new economic and/or regulatory arrangements for services and the digital economy.

However, the EU has since rejected the UK’s customs proposals on the ground that the EU will not delegate the application of its customs policy and rules, VAT and excise duty collections to a non-member who would not be subject to the EU’s governance structures.

With the facilitated customs arrangements now apparently off the table, it is increasingly likely that the UK is heading for a no-deal “hard Brexit”.

What does this mean for business?

Business should now be preparing for a no-deal Brexit.

  • EU member states would be obliged to impose VAT as the UK leaves the EU VAT system and EU information exchange system which identifies who should pay VAT
  • UK businesses may suffer from a cash-flow disadvantage when importing EU goods
  • WTO Rules will apply meaning that tariffs will be charged on exports and imports, to and from the EU
  • There will be a hard border between the Republic of Ireland and Northern Ireland
  • There will be border checks for goods which will result in additional time costs to supply chains
  • The government has suggested that they would prioritise continuing the flow of goods across the border over the collection of customs duties and VAT at the border. Whilst this is likely to become quite chaotic, the government’s aim would be to keep the existing customs and VAT procedures similar to what they are now.

If you would like to discuss what any of the above means for your business, please contact Alan Sinyor.

 

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