Brexit – What did the Romans ever do for us?

First, whilst the UK Government has not made this plain, the intention is to retain VAT in the UK and, reading between the lines, in its current form.  That is a relief as, for example, trying to change systems, including invoicing routines, by 31 March 2019 would be a tall order even for the most efficient and well-resourced of companies.

Next, the Conservative Party, which is still likely to form the next UK Government, has made it plain in the manifesto it issued for this election that it intends to take the UK out of both the Customs Union and the Single Market, and to negotiate something which provides the UK with similar (or better) benefits.  A “manifesto” is a set of pledges made by a political party, but these are not promises – the elected Government does not have to stick to them and a cynic might say the evidence is that at least a proportion of manifesto pledges are either ignored, fall away, are clarified or are overturned in the course of a Government (normally five years).  However, in my opinion it would be very difficult for the UK Government to walk away from such a pledge.

So, when it comes to the UK and the rest of the EU parting ways, as regards VAT I am reminded of Monty Python’s The Life of Brian and in particular that famous “What did the Romans ever do for us?” sketch.  I doubt I have picked everything up, but I have set out below what I think the Single Market has done for us when it comes to VAT and trade between the UK and the EU.  And the consequences of the UK leaving the Single Market in particular which, at the minimum, shows what needs to be negotiated and agreed upon before 31 March 2019 to put something at least as good in place.

And this article is going to be lengthier than I anticipated, because there is a lot to be undone and then resolved.

The biggest issue is where to tax transactions and in doing so avoid non-taxation or double taxation.  When it comes to nations, who gets the tax is very important.  And you can certainly boil the crux of the issue down to a few industries to understand where the governments are coming from – the motor industry, telecommunication, broadcasting, the internet and electronic trading, oil, gas and electricity.  Why?  Because this is where the biggest tax yields come from – remember that in reality it is the public that pays VAT – the final consumer – and if your people are buying cars, or watching Formula 1, you want the tax collected from them.

A lot of these rules mean that a business is required to account for VAT in the one or more Member States – local VAT registrations and VAT returns are required in principal.  However, some “simplifications” have been agreed, and if these cannot be replicated when the UK leaves the EU, there will be administrative issues for cross border suppliers.  So, let’s have a look at a few of these simplifications which are at risk.

Supply of goods

The first big simplification is that in most circumstances B2B supplies of goods cross border are VAT free.  Clearly there are no Customs entries, and VAT does not have to be financed on the goods entering the other country.  So, for the exporter, the issues will be ensuring your systems can cope with the new Customs entries and preferably online because that is the way it is going – a model has already been developed between EU countries which if the various countries could pull their fingers out is capable of being adopted in a short period of time to manage this.

One big exception to this rule is where goods are installed or assembled as part of the contract.  In principle if you supply goods, and then install or assemble them in the other country, you are required to VAT register there and charge local VAT.  At present, there is a simplification (subject to various boxes that need to be ticked – but it works) which gets around this and allows the customer to charge itself VAT (and then reclaim it subject to the customer’s taxable status).  This is at risk for both suppliers to the UK and suppliers from the UK from 1 April 2019.

For B2C supplies of goods, at present UK suppliers must register in the customer’s member state (subject to a financial threshold).    From 1 April 2019, unless something else is devised, these will become imports in the recipient member state (mainly I would guess postal imports), and VAT and Duty will have to be paid by the customer subject to any small value exemption which may still exist (the UK has been at the forefront of making the rules for this concession stricter mainly due to supplies from the Channel Islands which were getting into the UK VAT free).  It will be obvious to businesses supplying B2C that such a position is going to be damaging to trade.  So that benefit is at risk – it does seem peculiar calling the distance selling rules a “benefit”, but compared to the alternative, they are.  For example, would you prefer doing a local VAT return and charging local VAT to restructuring your business to create a subsidiary or branch in the other country with all the costs and hassle that would involve?
There are then special rules for supplies of electricity and gas – don’t forget, for example, that there is a link from France where they supply the UK with their electricity (will we need an underwater Customs’ post with an on/off switch?).

Purchases of goods from another member state

The current position, with a few exceptions, is that if you are a business and you purchase goods from another member state, you will acquire those goods VAT free and only pay the tax on the goods when you submit your VAT return (and most likely reclaim it at the same time).  The place of taxation is determined by where the intra-Community acquisition of goods is made (i.e. the Member State where the goods are finally located after transportation from another Member State).
I’ve covered off the distance selling rules and supply and installation contracts already – so I won’t go into those aspects again.

However, I will go into the position of importing from another member state.  Following Brexit, in principal importing goods into the UK (or from the UK) would mean paying VAT and Customs Duty at importation (if the goods are allowed in – quotas etc – something else you will need to find out before contracting to buy or sell goods).  The norm is that unless you pay this VAT and Duty, your goods will not move off the port, airport or terminal.  In the UK, I would doubt that the Duty Deferment facility would change, thus allowing this easement – basically the VAT is paid by direct debit the following month, subject to HMRC holding a guarantee upon a UK bank or insurer.  That guarantee will cost around 1% of its value each year.  It seems possible that clearance times, or even clearance locations, will also be affected, and that is also something that the importer will need to consider.

And then we have “Triangulation”.  For example, this is the situation where the goods move from Member State A to Member State C, but the invoice flows from Member State A direct to Member State C.  I don’t want to go into the various alternatives and complexities here, but the simplification means that the companies in the chain do not have to register for VAT in other countries.  That goes.  From the UK end it may be relatively simple, in that the importation of the goods is taxed as an import (above).  However, if a UK company is selling goods to a French company, and the goods are sourced in Germany, the UK company will have to register for VAT in Germany (where the transportation of the goods begins).  When people tell me that we can just go back to how it was before the completion of the Single Market (1991 and earlier), it is examples like this that make me know that, unless a clone of the Single Market can be negotiated, that just is not going to happen.

In the last 25 years’ supply chains have become more complex and the “old” rules really do not cope with this in a business-friendly way.  I was at Chester Zoo not that long ago and saw a weird plane in the sky above the zoo.  On asking I was told it was transporting plane wings to Toulouse – how will that work come 1 April 2017? Does Airbus relocate the UK operations to a Freeport?  Does it just move production to France or somewhere else in the EU?  Who is going to pick up the extra costs?

Supply of services

The basic rule is that cross border supplies of services are taxed where the customer is.  This could have caused big problems for countries like the UK which have large service industries.  So, some simplifications have been developed over the last twenty-five years to try to relieve a burden from business – registering for VAT wherever your customers are, paying local VAT and all the obligations that go with that.

The solution, for most supplies, is a reverse charge on B2B supplies – once again this principle of the customer charging itself VAT and then looking to recover that VAT is what is relied upon.
This is at risk, and a replica needs to be agreed by 31 March 2019.  If it cannot be, then more UK service suppliers will be required to VAT register in the markets where they trade.  This will add costs, but far worse could be a blockage to trade if the rules are not complied with.

But B2C services could see a far more radical change.  Except for electronically supplied services, where we would hope the current system would persist, just that the UK would be treated the same as, say, the United States is right now, the current position whereby the service provider charges their own VAT is unlikely to persist.  This could result in B2C service providers needing to VAT register wherever their EU customers are located.

I’d guess most suppliers of B2C services would not be so happy about this and some may even choose to withdraw from certain markets as the administrative cost would outweigh the profits that could be made.  Given the lead time for consumer campaigns, the suppliers of services to consumers should be looking at their strategy now.

Summary

One thing strikes me about all of this.  The impact is as great for EU businesses as it is for the UK.  If you take just one industry, cars, there is as much at stake for France, Germany, Spain, Romania and the Czech Republic as there is for the UK.  This then makes me think that the European Commission’s official standpoint that trade negotiations cannot start until the divorce is well on the way to being settled is equally unrealistic as the UK Government’s position now.

So, I hold my breath and once again think what the Single Market has done for us.  And if both parties to the negotiations do not wish to burn their boats, or throw the baby out with the bathwater, perhaps a viewing of The Life of Brian would help bring them to their senses.