Brexit is expected to bring an additional cash flow burden for UK businesses buying and selling goods with EU counterparts. Cross border traders should start preparing now to mitigate the impact of this and other forthcoming VAT changes.
VAT and Customs Duty are closely bound up with the UK’s membership of the EU and will be in the front line of changes affecting businesses when the UK departs from the EU.
The terms and timing of the UK’s departure are currently subject to negotiation between the UK Government and the EU. Therefore, the precise impact of Brexit on goods bought and sold between the UK and EU may not be clear for some time. However, recent position papers issued by both sides indicate that a ‘hard Brexit’, which will impose a customs border between the UK and the EU, is a strong possibility.
Apart from the supply chain impact of Customs Duty and border controls in a hard Brexit, businesses could also face the burden of paying import VAT on goods brought into the UK. Currently, VAT on B2B arrivals of EU goods is accounted for under the ‘reverse charge’ procedure on the buyer’s VAT return, usually as a NIL net tax adjustment. However, after a hard Brexit, UK importers may face a liability to pay import VAT (at 20% for many goods) at the time that the goods enter the UK from the EU (unless and until HMRC introduce postponed accounting for import VAT, perhaps just for imports from the EU, via a UK trader’s UK VAT returns). This import VAT would not be recoverable until the UK importer submits its next monthly/quarterly VAT return form to HMRC – putting pressure on the UK importer’s cash flow and working capital and potentially leading to increased bank guarantee charges if they operate an import VAT/duty deferment account.
In its November 2017 Budget, the Government has acknowledged the effect of a customs border on import VAT and pledged to look at options to mitigate the import VAT cash flow effect on the supply chain; however, it has yet to make specific proposals.
Other changes affecting import VAT
Two other VAT changes are also expected to affect importers in 2019:
- The EU’s proposed Single VAT Area reform is scheduled to begin on 1 January 2019 which would require UK traders to be approved by HMRC as ‘Certified Taxable Persons’ (CTP) in order to continue to use ‘reverse charge’ VAT accounting for intra- EU acquisitions/dispatches. Any agreement for the UK to stay in the EU single market for a transitional period after Brexit may make CTP status a long term necessity.
- From 1 May 2019, UK businesses using the Simplified Import VAT Accounting Scheme (SIVA), which allows importers to defer payment of import VAT to HMRC without providing a financial guarantee, will be subject to more stringent eligibility requirements.
Both of the above issues can be addressed by obtaining accreditation as an Authorised Economic Operator (AEO), which should provide faster customs clearance and approvals for cross-border goods movements as well as automatically meeting approval standards for SIVA and CTP.
Action points for UK importers
UK businesses buying goods from EU suppliers should investigate now what levels of import VAT/duty may apply on their post-Brexit imports into the UK from the EU. At the same time, they should consider what relief mechanisms may be appropriate to implement post-Brexit in order to defray those post-Brexit import VAT/duty costs, eg import VAT/duty deferment account, Customs Warehouse, etc.
More urgently, they should consider applying to HMRC for AEO accreditation. The current application process for AEO already takes around six months and this lead time is increasing as HMRC receives more and more applications from UK businesses worried about potential disruption/ delays to their post-Brexit EU/UK goods movements.
What about exports to the EU?
Not only could a hard Brexit create import VAT issues for goods arriving into the UK from the EU, it could also mean that UK businesses selling goods to customers in the EU will need to consider the effect of import VAT/duty charged by EU member states at the point of entry of the goods into the EU from the UK.
If the UK supplier is contractually responsible for delivering the goods direct to the EU customer (eg on ‘delivered duty paid’ shipping terms), it may also be required to clear the goods through EU Customs, thus having to pay import VAT (and potentially Customs Duty too, depending upon whether or not a post-Brexit customs union between the UK and the EU is agreed) at the VAT rate chargeable in the EU member state of entry.
This could also give rise to a potential liability for the UK supplier to register for VAT in one or more EU member states in order to recover the import VAT that it pays there, cash flow issues while waiting to recover the import VAT on a local VAT return (or by another claim mechanism), and a liability to account for (and invoice) local VAT on its supply of goods to its EU customer using local VAT rates, which may be different from those that apply in the UK.
Action points for UK exporters to the EU
UK businesses selling goods to EU customers should investigate now what levels of import VAT/duty payable in other EU countries may apply on their post-Brexit exports from the UK to the EU. Critically, such UK businesses should review any contracts with their EU customers that run beyond the expected Brexit date of 29 March 2019 to determine whether it is the UK business or its EU customer that is liable for any EU import VAT/duty and EU customs clearance charges on post-Brexit goods movements. If the UK business is liable for these costs, it may need to register for VAT in other EU countries in order to recover the import VAT that it pays there and may be required to appoint a local fiscal representative in order to be able to register for VAT in those other EU countries (yet more costs of exporting).
At the same time, UK businesses should consider what relief mechanisms may be appropriate to implement post-Brexit in other EU countries in order to defray those post-Brexit import VAT/duty costs in other EU countries, eg import VAT/duty deferment account.
For help and advice on this issue or any other queries on how Brexit will affect your VAT profile, please get in touch with your usual BDO contact or Peter Wood.