VAT and customs implications of a 'no-deal' Brexit

The UK is scheduled to leave the EU at 11 pm UK time on Friday, 29 March 2019. With that date fast approaching, although the government maintains that leaving the EU without an agreement is 'unlikely,' it has published a series of guidance notes to help businesses to prepare for that eventuality. Several of these notes cover the VAT and customs duty implications of a 'no-deal' Brexit.

The guidance note on VAT confirms (as we already knew) that the UK will continue to have a value added tax (VAT) system after Brexit, and that, although the government aims to keep VAT procedures as close as possible to what they are now, there will have to be some changes in the event of a no-deal Brexit.

Importing Goods

VAT

One piece of good news is an announcement that businesses importing goods from the EU, or from outside the EU, will not have to pay VAT as soon as the goods arrive in the UK, but will be able to account for the VAT later, in their VAT return.

At present there is no need to pay VAT when goods from the EU arrive in the UK Instead, a business importing from the EU accounts for VAT on the imported goods in its next VAT return, offsetting input tax against output tax, meaning no cash outflow to HM Revenue and Customs if the importer is using the goods to make taxable supplies.

The government's original proposals would have meant that UK retailers and manufacturers would have to pay VAT upfront on post-Brexit imports of goods from EU member states, in the same way as currently applies for imports from outside the EU. The VAT can be reclaimed if the importer is going to be using the goods to make VATable supplies, but there is a cashflow disadvantage as the VAT will only be recovered or offset in the importer's next VAT return (usually made quarterly).

The fact that the import VAT will be deferred is a welcome announcement, as small businesses, in particular, were very concerned about the cashflow implications of having to pay VAT upfront. It makes sense that the government will extend the treatment to imports from outside the EU as it would be illogical after Brexit to treat trade with non-EU countries less favorably.

Although this cashflow benefit for importers will, of course, come at a cost to the Treasury.

Customs

However, it is not all good news. Even though the guidance provides it will be possible to defer the VAT, customs declarations and the payment of any other duties will still be required for imports from the EU in the same way as currently applies when importing goods from outside the EU. This means that for goods entering the UK from the EU, an import declaration will be required, customs checks may be carried out and customs duties must be paid.

Another government note on trading with the EU if there is no deal sets out the steps importers will need to take. This includes registering for a UK Economic Operator Registration and Identification Number (EORI) for businesses which do not already have one—although the government says this need not be done yet.

The guidance also says businesses will need to consider how their goods will be classified and how they will submit import declarations, and suggests they may want to consider acquiring software and/or engaging a customs broker, freight forwarder or logistics provider.

The VAT guidance also confirms that if there is no deal with the EU, Low Value Consignment Relief (LVCR) will be abolished for  goods entering the UK as parcels, whether from within or outside the EU. LVCR currently exempts from VAT goods worth less than 15 pounds which come into the UK from outside the EU (except those coming from the Channel Islands).

The abolition of LVCR means that all goods entering the UK as parcels sent by overseas businesses will be liable for VAT unless they are zero-rated or exempt from VAT. For parcels valued at 135 pounds or less, we are told a 'technology-based solution' will allow VAT to be collected from the overseas business selling the goods into the UK For goods worth more than 135 pounds, existing procedures for parcels from non-EU countries will apply to those from EU countries.

At present customs duties are not payable when goods are imported from the EU. In the event of a no-deal Brexit, the UK will require payment of customs duty on imports from the EU, at rates yet to be set by the UK government—which the guidance says may be different from the rates in the EU’s Common Customs Tariff (CCT).

Exporting Goods

UK businesses supplying goods to EU individuals will see a change in their VAT treatment, if there is a no-deal Brexit. They will be able to zero rate the supply and will not have to comply with the EU distance selling rules, which may have required them to register for VAT in another member state or to account for VAT in the UK, depending upon the level of their sales in that member state.

Businesses supplying goods to EU business customers will be able to zero rate the sales, as at present. Although they will no longer have to complete EC Sales Lists, they will have to retain evidence that the goods have left the UK

After Brexit, EU member states will treat goods entering the EU from the UK in the same way as goods entering from other non-EU countries. This is likely to result in import VAT and customs duties due when the goods arrive into the EU.

Should there be no Brexit deal, businesses exporting goods to the EU will need to follow customs procedures in the same way that they currently do when exporting goods to a non-EU country. As with imports, businesses will need to register for a UK EORI number and should consider whether they will need professional help to submit export declarations.

A further government guidance note gives more details on post-Brexit tariffs if there is no deal. For UK exports to the EU, the EU will require payment of customs duty at the rate under the EU’s CCT. 

Services

The rules around place of supply for VAT purposes will continue to apply in broadly the same way that they do now.

For UK businesses supplying digital services to non-business customers in the EU, the place of supply will continue to be where the customer resides and so VAT will be due in that EU member state. At present the VAT Mini One Stop Shop (MOSS) allows UK businesses that sell digital services to consumers in other EU member states to report and pay VAT via a single return and payment in the UK If the UK leaves the EU with no deal, UK businesses will only be able to continue to use MOSS if they register for the VAT MOSS non-Union scheme in a country which remains in the EU.

However, the guidance highlights the tight timescales involved in this registration—which can only be done after the UK has left the EU, and would need to be done by April 10, 2019 to cover sales made after 11 pm on March 29 to March 31, 2019. The alternative would be to register in each EU member state where sales are made.

For UK businesses supplying insurance and financial services, the guidance says that, in the event of a no-deal Brexit, input VAT deduction rules for financial services supplied to the EU 'may be changed,' but no further information is given at this stage. If the government decided to allow input tax recovery in relation to financial services transactions with EU counterparties this could significantly reduce irrecoverable VAT for these businesses. 

It is also not clear from the guidance what the impact will be for travel businesses using the EU Tour Operators Margin Scheme (TOMS).

Irish Border

Other than confirming the government's commitment to act in the best interests of the people of Northern Ireland, there is no guidance for businesses in Northern Ireland importing and exporting to Ireland, other than a suggestion to consider consulting the Irish government.   

Planning Points

Although there is a little in the guidance that businesses could not have worked out themselves by applying the rules that currently apply to non-EU imports and exports, it is helpful to have specific guidance. The announcement regarding the deferment of VAT on imports will also be a welcome cashflow boost for importers of all sizes.

Whether these no-deal measures will need to be implemented remains to be seen, but with less than seven months to go, businesses need to ensure that they are prepared for that eventuality.  

Businesses need to look at their imports from and exports to the EU and work out what the impacts of a no-deal Brexit would be for their business, particularly in the immediate aftermath of the UK leaving the EU. They need to consider whether there are any official registrations they will need such as an EORI number and/or a Customs Comprehensive Guarantee (CCG) and how long it will take to receive these. They will also need to consider what additional resources and professional help they will need to cope with increased administration, particularly if they do not currently import from/to countries outside the EU.

Whilst it may be tempting to wait to see what the outcome of the UK's negotiations with the EU will be, that may not allow sufficient time to get the necessary measures in place should there be no deal.

Catherine Robins is a tax expert at Pinsent Masons LLP, the law firm behind Out-law.com. This update is based on an article which first appeared on Bloomberg Tax.