Brexit VAT Implementation – a dangerous game of Brussels roulette

On 6 January 2018, The Guardian, a quality UK newspaper renowned for misprints, published an article related to the imposition of VAT on imports from the EU following Brexit.  To say this awakening was at the eleventh hour is a bit of an understatement – the relevant legislation passed through the UK Parliament on 8 January 2018.

A problem came to light – well, not really

However, it is good to see that the UK press, and so it seems the influential Parliamentary Treasury Committee, has caught up with what just about every VAT specialist in Europe has been pointing out since before the referendum in 2016.  Cross border VAT law is changing.  I said “just about every VAT specialist” because the newspaper quoted “experts” who seemed unaware of the full position at present with imported goods, were clearly unaware that VAT changes for services are indeed far from simple, and that there are problems for UK exporters to the rest of the EU and of course for EU importers from, and exporters to, the UK following Brexit unless something is resolved both in the UK and in the rest of the EU.

What has since become clear is that ministers have either spoken off the cuff on the subject or that their briefings have been incomplete at best.

So, I am setting out here what we know so far.  And I will be parochial and address goods imported into the UK from the rest of the EU.

That does not mean that exporting goods from the UK to customers in other EU member states will not be a problem.  It could well be.  Indeed, some UK business may find that they need to change the way they trade (holding stocks in France or Holland, for example), and others may find their margins squeezed as customers seek to share the burden of their added costs of importation form the UK.


In theory the change will happen on 29 March 2019.

I say “in theory” because the implication of the Brexit Phase I agreement on 8 December 2017 was that we would have a transitional period on broadly similar rules to what we have now (I celebrated – briefly).

Sadly, the UK Government then made it clear that it would renege on that agreement if it suited them, creating big issues at the time.  Things have been smoothed over since, barring the occasional sabre rattle, and so we are now to believe that all will be OK on 29 March 2019, and there will be no change for VAT on imports into the UK from 29 March 2019.

That is until 31 December 2020, according to the EU negotiators, when they expect the transition to be completed.

Of course, none of that has been agreed between the UK and the EU27, the contradictory messages from the UK Government have not been helpful for anybody considering international trade, and an influential cabal within the Conservative Party (the political party forming a minority Governing in the UK) seems determined for the UK to fall out of the EU and all EU mechanisms from 29 March 2017.  No, I don’t understand why.

In the meantime, Mrs May, the UK Prime Minister has suggested recently that we may need a longer transitional period – no surprise there for those of us living in the real world, but this of course contradicts what is wanted by her colleagues who wish to cut the ties as soon as possible.  And then the UK Government is yet to tell us what it wants out of Brexit.  We are promised something “concrete” shortly.

Why all of this background?  Just to highlight that it is difficult if not impossible to second guess what will happen from 29 March 2019 onwards.

So once again I can only advise that we plan for the worst and hope for the best.  As far as international trade is concerned, dropping out of the EU on 29 March 2019 with no transitional arrangements is the worst scenario, whilst allowing a reasonable period to put the new mechanisms in place (an extended transitional period) is what I’d hope for.

Right now, the UK reversing the Brexit decision is but a dream or a nightmare dependent upon which side of the UK fence you sit.

A step back in time

At this stage, for those who remember the completion of the Single Market in 1992, I would remind you that the solution Europe came to then on VAT is the one we have now.  So, it is those far reaching measures that are being reversed for trade between the UK and the rest of the EU.

And as you will also recall there was a five-year transition period lasting until 1997 to finalise the completion of the Single Market for VAT.  And you will know that deadline was eventually abandoned, which is how we get to where we are today.  The 1992 transitional period has either lasted for 25 years or else the transitional rules were adopted as the final rules in 1997, dependent upon your point of view.  I subscribe to the latter.

There are many things I could extrapolate from this set of facts, but I will stick to one – the transitional period cannot be finalised on 31 December 2010.  It cannot be done.  So, provided Mrs May’s cabal are kept under control and the EU27 also take a sensible approach, common sense suggests an extended transitional period.  Probably not one which goes on for ever, as with what happened in 1992, but maybe one for five years.

Brussels Roulette – where will you place your bets?

But that is a sideshow of reality within a difficult technical scenario.

According to the UK judiciary, “Beyond the everyday world… lies the world of VAT, a kind of fiscal theme park in which factual and legal realities are suspended or inverted”.  I think that it is more akin to a “game” of Russian Roulette, but with the life of businesses at risk – Brussels Roulette.

So, let us look at the facts from a worst-case scenario, based on planning for the worst and hoping for the best.

These are the loaded chambers of the gun if the UK just falls out of the EU on 29 March 2019.

Do Nothing

Goods imported from the remaining EU member states will bear UK VAT at importation at the prevailing rate (let’s assume 20%).

If you do NOTHING, then the VAT must be paid to Customs at importation and payment will be by cash or bankers draft and you will reclaim the VAT on your current VAT return.  That is a cash flow hit, an administrative hit and, if you delay payment you don’t get your goods, thus putting your business at risk.

Freight Forwarder

But you can ask your freight forwarder to pay the VAT for you, which they will do, generally for a fee of up to 2%.  You then pay the freight forwarder according to your commercial terms, and then reclaim the VAT on your current VAT return.  This is still a cash flow hit but does at least provide some certainty which may well make the 2% cost worthwhile.

Duty Deferment

If you are a regular importer you can apply for “duty deferment”.  An important part of the process is to obtain a bond from a UK bank or insurer equal to twice the maximum VAT (and customs duty) you expect to pay each month.

Typically, a bank will try to charge you 1% of the value of the bond each year.  Also, typically, the bank will take the value of the bond out of your overall facility – you could find your overdraft reduced substantially if you are not careful.

If approved, your goods will move “smoothly” off the port and the VAT and Duty will be collected by direct debit two weeks into the following month.  The VAT can then be reclaimed on your VAT return for the month of importation.

Sorry for the “smoothly”.  As a rule, goods do move smoothly now.  However, there are doubts as to how prepared UK Customs will be for Brexit, so “smoothly” is not a word I expect UK importers (or exporters) to use for at least a period of time following Brexit (and “frictionless” seems even less likely).

For that cynicism, I will atone by dropping in a planning tip – model your VAT as if you will no longer use acquisition tax, but instead just reclaim the VAT on imports as you do now.  If the result is that you look like you will be in a regular repayment position, apply for monthly VAT returns from March 2019 onwards.

But I digress.  This is still a cash flow hit, but as a rule not as bad as paying by cash or bankers draft or using a freight forwarder to pay the import VAT for you.

Simplified Import VAT Accounting (SIVA)

Not to be confused with the Hindu God Lord Shiva, sometimes spelt Siva.  Shiva is the quintessential destroyer. His duty is to destroy all the worlds at the end of creation and dissolve them into nothingness.  SIVA, however, should be good news, and something businesses currently paying VAT on imports should consider applying for in any event.  But not as potent as Lord Shiva.

You must apply to be SIVA authorised.  You will need a very good compliance record to be accepted.  However, once accepted, the impact is that, whilst you will still have a duty deferment guarantee for Customs Duty, it could well be much reduced or even nil for imported goods that do not attract any Duty.  The scheme lets you defer the VAT on imports so that you account for the VAT very much as you already do with goods acquired from other EU member states.

My recommendation would be to start preparing for your application immediately and to try to get it in early.  There could be a mad rush come 1 January 2019 – maybe not the January sales, but still too much for HMRC to cope with.

Postponed Accounting System (PAS)

You need to be quite old to remember PAS, scrapped in 1985 by the then Chancellor Nigel Lawson as he needed a cash flow boost and so took £200m out of the cash flow of UK importers.  PAS works very similarly to SIVA.  Except that everyone could use it – even if you had a bad compliance record.

During the last UK Budget a suggestion was made as to the return of PAS, although all has gone quiet on this since.  And it was this suggestion from the Treasury that the many “experts”, ministers and politicians omitted to mention during the hysteria in January.  At a stroke, a return to PAS could eradicate the import VAT issue for UK VAT registered businesses, cut down the need for Customs staffing and resources, and help “frictionless” trade between the UK and the EU27.

But of course, this is right at the “hope for the best” end of the scale.

Suspensive regimes

Pretty much standard reliefs can also be looked at for specific circumstances such as Customs Warehousing (it can even be on a computer for some goods), temporary importation, inward processing relief and outward processing relief.

More businesses will need to look at these, especially those that for the time being will retain their current manufacturing process with goods moving backwards and forwards between the UK and the EU27.

Once again, my view, because of the limited staff available in HMRC, is that businesses should start considering and applying for these processes now.  Leaving it too late could mean that you are not “approved” come the day (whenever that is).

Brussels Roulette

The name of the game is very unfair, but that is the nature of British politics.

You’ll see I’ve come up with six alternatives, much like the six chambers in a revolver used in a game of Russian Roulette.  You’ll note that there are no empty chambers!  You’re going to catch something.  You’re aim, though, is simple – identify your risk and manage it.  Yes, we can all hope for a return to PAS, but even then, Customs Duty will be payable on imports from the EU27, so you will need to get duty deferment in place for goods coming from the EU27 or, if you can, apply for one of the suspensive regimes.

If you fail to manage it, then you risk going out of business – it is that stark.  I’d like to think that the UK Government would set up some form of safety net but given how far on the politicians seem to be with the high level strategic thinking, that is more likely to be thought about on April Fool’s Day 2019, rather than before.

Steve Botham