Although the exact terms of Brexit are yet to be decided, businesses and experts are working hard to predict what the UK’s exit from the EU could mean for them. With little information flowing from the Government in terms of plans, demands or ambitions, it’s largely been left up to individuals to try to work out how Brexit could impact on their industry, their operational practices and their finances.
One aspect of Brexit that could have a significant impact on everyone in the UK is VAT. The ramifications of the VAT agreement that the Government finally makes with the EU will be felt by businesses, online shoppers and pretty much all consumers across the country, with a bad deal potentially costing the country’s economy billions. So what exactly are the predicted effects of Brexit on VAT? And how could the changes impact on you, your business and your finances?
Paying VAT on imported goods
For businesses that import goods and services from other EU countries, the question of how VAT will be handled following the UK’s departure from the EU is a big one. At the moment, British companies are able to register with HMRC to bring goods into the UK without paying VAT. The companies simply register the VAT charge and then reclaim it later as a purely paper exercise. VAT is then added to the cost of the product whenever it is sold to the final customer.
However, this arrangement relies on cooperation with the EU. If the UK Government doesn’t strike a VAT deal with Brussels, up to 130,000 British businesses could be forced to pay VAT upfront for goods imported from the 27 EU member states. Businesses will likely have to take out costly bank or insurance backed guarantees, something that will put considerable strain on many companies’ finances. If this happens, it’s likely to cause major cash flow problems for UK businesses and could even force some companies to go under.
VAT on exported goods
Although the cost of paying VAT on goods imported from the EU is the issue concerning most UK-based retail businesses, for companies that sell to the EU, VAT on exported items is also likely to be a sticking point.
At the moment, cooperation between EU states means the process is easy and fairly straightforward. However, once Britain leaves the EU, it will no longer be part of the EU VAT Union and there will be nothing to stop the 27 EU member states slapping higher rates of VAT or import tax on goods that originate in the UK. This could make British goods a lot more expensive for EU buyers and may well put shoppers off buying UK-made products.
Leaving the EU VAT Union could also force UK suppliers to register for VAT in one or more EU member states in order to recover the import VAT that they pay there. This is turn could cause cash flow issues for companies as they wait to recover the import VAT, and may result in UK businesses having a liability to account for, and invoice, local VAT to EU customers using local VAT rates. This convoluted system is likely to make trading more expensive, more time consuming and more costly – something that a lot of businesses may not be able to afford.
Paying VAT on goods purchased online
According to figures published by the European Commission, UK consumers are the most confident e-shoppers in the EU. In 2016, nearly 88% of UK shoppers bought domestic goods or services online, with the average person spending £380 over three months. This is compared to 77% of other EU residents shopping online and spending an average of £142 each within the same period.
A huge percentage of the goods purchased online originate in other EU countries. When a British buyer places an order online, their goods are shipped to the UK, sorted and delivered to the recipient without any extra paperwork or fees. Goods purchased from outside the EU, however, are often subject to important taxes and handling fees. This delays the delivery process and makes it more expensive and less convenient for shoppers to purchase goods from outside the trading block.
If the UK leaves the EU VAT Common Area, there’s a chance that all goods that arrive from the EU will be treated in the same way as goods purchased from the rest of the world. This means increased delays and expense for the consumer and could result in online shopping becoming a lot more complicated.
At the moment the UK VAT system is harmonised with that of the EU. By sharing information between member states, the EU is able to help governments keep track of goods purchased and calculate taxes that are due. When the UK leaves the EU, it will no longer be required to harmonise its VAT rate with other member states, giving the UK government the option to slash VAT or even replace it with a new tax altogether.
However, although slashing VAT would likely be a vote winner in the short term, have a significantly lower rate of VAT would make trade between the UK and the EU much more complicated in the long term. Likewise, bringing in an entirely new tax may give taxpayers the illusion that they’re separating from the EU for good, but it will also cause serious issues in the flow of goods and could significantly disrupt the UK economy.
Coming up with a sensible and workable solution for the VAT problem should be a real priority for the UK Government. With the country set to leave the EU in less than 12 months, now’s the time to put businesses’ minds at ease and make some concrete announcements about how things are going to move forward once Britain is out of the EU.