Don’t look back in anger

I originally started this article with “It is only when you look back that you can find how far you have come.  And as we come to the end of another year, it does not hurt to look back.”
However, it did!

Looking back

I got to Brexit and quite frankly the admission by Mrs May, the UK Prime Minister, on 19 December that she and her senior ministers had formally discussed for the first time what the UK’s long-term relationship with the EU should be really made me feel that the rest of the year of grief and turmoil over Brexit had been a waste of time. Indeed, this was a shock even after another recent revelation by the UK Government that economic analyses they had boasted about and upon which they had relied did not exist.

Many people who read this newsletter are business people, business advisers and business investors. Would you run a business like this? But it does answer an important question as to Brexit.
We’ve sought clarity for a long time and now we know that there isn’t any.

We can choose to just get on with things as best we can, making our decisions on what we know, or we can join the UK Government and do nothing. Of course, if we do nothing we will soon run into trouble with our businesses, so that’s not a real choice for us. Mind you, we could improve our cash flow by playing fast and loose with our tax declaration and payments, following the example of the UK Government. Sorry – only slightly tongue in cheek, but you get the point, not least because they are wasting our money!

Looking forward

So, I have put together a wish list for 2018 which is about as substantive as the UK’s position on Brexit.

Brexit

Could we please have a trade agreement in the round by Easter?
Could we please have operational detail by September 2018?
And please could common sense prevail, and a five-year transitional period be agreed – everyone knows that two years won’t do it, so why not admit to that negotiators?

UK Taxation

Could the reduced resources of HMRC please concentrate on collecting tax from the largest avoiding taxpayers, starting with the corporates? Cracking one set of arrangements would be enough to reward the effort. Tax avoidance is legal. So is successfully stopping it. We work hard protecting businesses which are subject to tax investigations. tax dispute work is a key part of what we do, and we are good at it. But can it be right to drag a case out for two years over £40,000 from a retired small businessman in poor health with no liquid assets?

Please could we finish off the “new” IT projects, and particularly those which relate to international trade? And then make sure they work? Properly? And make sure that taxpayers can use them? Please? And don’t start any more until we’ve achieved that? Please? We all know that Information Technology can be a money pit, especially when it does not work properly, or has been superseded by the time it is implemented? And after all, the UK Government’s track record in such matters is not good.

Scrap MTD (Making Tax Digital). It is a waste of time and money for UK businesses. The timing of introduction coinciding with Brexit is appalling. And please take the new points based penalty system with it. We don’t need another set of penalties. As for the new systems – please see my earlier comments – free up some resource by at least shelving MTD.

UK Government spending

Call a moratorium on “great ideas”, particularly in the NHS and Education, and concentrate on properly funding and getting right what we have now. As a country apparently determined to get rid of “red tape”, why do we tie ourselves up in it?

I guess Brexit comes in here, but my wish to scrap Brexit in order to save £billions of wasted money, red tape and administrative hassle will fall upon deaf ears. My justification? Please see “Brexit” above. Who would commit to spending at least £50bn when they don’t know what they intend to achieve? Except a Government, of course, spending someone else’s money.

Love and peace for the world

This is a tax wish – conflict costs Governments money. Governments’ money comes from taxation. Remember, that colonies have been lost over taxation to pay for wars.
Normally this last wish would be the most outlandish. However, given the other wishes on my list, it is probably the most achievable!

And “Don’t look back in anger”? Noel Gallagher’s lyric makes more sense every day when faced with all of this.

We wish you a Happy Christmas and a Prosperous and Peaceful New Year.

Doing business differently

As a practice we have worked hard to move ourselves onto web based products so that our team can work anywhere with a decent Wi-Fi connection. We also like to think Covertax is well entrenched in 21st century values.
Our infrastructure means we all have access to video conferencing and telephone conferencing. We do not see these as a real substitute to meeting face to face, but there are times when it is a sensible solution.

Right now is one such example.

We are based in Coventry in the heart of the UK which is about to see its worst snowfall for thirty years. For those of you living outside the UK, you may wonder what the problem with a few centimetres of snow is, but we in the UK are just not set up to manage severe weather. Whilst the weather is a well know British obsession, extreme weather always seems to catch us by surprise – for example, there is no requirement or encouragement to have a set of winter tyres for our vehicles.

Accordingly, over the next few days we expect road closures, public transport disruption and also communications and power disruption.

We will continue to do business but all team members are encouraged not to put themselves or anyone else, including the emergency services, at risk. We all can and do work from home.
However, there may be some disruption to our service caused by power or communication failures, for which I am sorry.

We have added our Severe Weather Policy to our website so please feel free to read and share it.
The Severe Weather Policy include reference to team members who are vulnerable persons. We also apply it to our vulnerable clients – we do not wish to put them at risk.

Steve Botham

Why so little care from HMRC for Vulnerable Customers?

We have some vulnerable customers. We take them seriously. So much so that in the last year we have developed a ‘vulnerable customer policy‘, and now all Covertax team members have undergone enhanced DBS checks.

Why bother?

Well our view is that just like you wouldn’t put your friends and relatives in the care of someone who has not been checked, we feel that the same should be expected of professional advisers.
In some of our cases we do develop a close working relationship. We are relied upon. And we wish our clients and their advisers to be sure that they are in safe hands. Hence going that step further.

And what about HMRC?

Whilst the Government seeks to protect vulnerable customers, there is no consistent vulnerable customers policy within HMRC or indeed the Tribunal Service. We know this because we have asked in respect of our own vulnerable customers. And we accept that either the respondents correctly reported a lack of vulnerable customers policy for all their customers, or else were living in ignorance of their policy, which in some respects is worse and would indicate a serious training need within HMRC. Indeed, we feel that there is a serious training need in any event.

HMRC makes no effort in normal circumstances to identify a vulnerable customer, or indeed agent, upon first contact.
The nearest we have to an HMRC policy is some isolated comment in respect of Direct Recovery of Debts (“DRD”), whereby HMRC can help themselves to the contents of the person’s bank account. Our understanding is that this policy arose because of pressure upon the Government to ensure that DRD did not disadvantage vulnerable customers. We have not seen this extended to other vulnerable customers within HMRC’s Debt Management regime, HMRC’s general contact with its “customers” nor within the appeals process either within HMRC or the Tribunal.

Direct Recovery of Debts

As regards DRD, HMRC says “Those who are identified as vulnerable will not be considered for DRD, and will be given alternative support to help them pay the money they owe.” Briefly, this means that HMRC will take the money in any event, but not by raiding the person’s bank account.

From what we have seen, there seems little regard to the challenges vulnerable people face. For example, we have live cases where the vulnerable person has received penalties instead of help – the worst example of this is a dyslexic HMRC customer served complex notices.
HMRC has, however, set out indicators for identifying vulnerable customers, but only in respect of DRD:

Indicator A – a disability or long-term health condition

For example, a disability, mental health condition or learning difficulty that directly impacts on debtors’ ability to communicate with HMRC or to manage their HMRC affairs, meaning they are unable to understand or appreciate their indebtedness. The effects of the disability or condition may be temporary or long-term in nature.

Indicator B – a temporary illness, physical or mental health condition

For example, diagnosed with a serious illness or condition that affects them to such an extent that they are unable to understand or appreciate their indebtedness or to put their HMRC affairs in order.

Indicator C – personal issues

Issue that affect them to such an extent that they could not understand or cope by themselves.

For example:

  • becoming recently widowed
  • a family bereavement
  • being made redundant
  • a serious illness
  • caring issues
  • trauma caused by an assault
  • domestic or financial abuse

These may be issues that affect [the taxpayer] directly or someone close to them (such as an immediate family member).

Indicator D – lower levels of literacy, numeracy and/or education

For example, learning difficulties that mean they are unable to fully understand their indebtedness without advice or support.”

Action

It is our view that both HMRC and the Tribunal’s Service should have a vulnerable customers policy for all aspects of their work. This is something we will campaign for through our various professional bodies, as well as in direct contact with HMRC.
We would encourage other professional firms to follow our lead, both in respect of their own customers, but also in respect of contact with their professional bodies and contact with HMRC.

Steve Botham

 

The lunatics have taken over the asylum (Fun Boy Three, 1981)

The original remark is attributed to Richard A. Rowland about the founding of United Artists. It is now commonly used to describe a situation in which those in charge are incapable of handling their responsibilities, and should rather be put under scrutiny themselves.

Fun Boy Three sung a protest song about the action of the Government at the time and the song has real echoes today some 36 years later.  But here I am writing about the crazy way in which the UK’s taxation civil penalty regime is now being applied.

In a widely reported VAT case, a business failed to reclaim input tax to which it was entitled on a VAT return and made the claim on a subsequent return.  To be clear, the business was out of pocket for a while, and the taxman was therefore better off.

However, the business failed to follow the VAT voluntary disclosure rules and just reclaimed what it was owed.  HMRC disallowed that claim to input tax, and then applied a penalty because of the careless error of overclaiming input tax on that specific return.

Really!  I’m not making it up.

There is a very good quote about VAT from Lord Justice Sedley in Royal & Sun Alliance (2003): –

“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.”

But don’t blame VAT, as we’ve now seen our first CIS case where tax is owed to the taxpayer, but upon which penalties running well into five figures have been levied for the administrative errors.

Now, before you get your pen out to write to your local MP, Horrified of Tunbridge Wells, technically HMRC can do this.  They did say they would not when the penalty regime was first introduced, and it was certainly not the intention of the Keith Committee when it considered how to improve VAT compliance all those years ago.  And there lies another tale.

They say that the then Prime Minister, Mrs Thatcher, was horrified by the press coverage reporting the alleged misbehaviour of Customs & Excise VAT officers.  This was doing her Government no good at all, so she asked her civil servants to get “Keith” to sort it out.  And accordingly, they appointed Lord Keith to commit his review, which instead of curbing the powers of Customs & Excise VAT officers, strengthened them.  Word has it that the civil servants appointed the wrong “Keith” – Mrs Thatcher, so they say, wanted her right-hand man Keith Joseph to do the job.  And that is the genesis of the current civil penalty regime for all taxes – a careless error.

So, all this is very interesting (for a tax consultant), but where does it leave us.  Well the first thing to say is to review your compliance procedures as soon as possible.  Get it right. Indeed, that was what Lord Joseph sought from the civil penalty regime – the right tax at the right time.  For example, when dealing with late input tax on VAT returns, we now mark those entries up, check whether they fall below the de minimis limit for adjustment on returns, and if so mark up the entries with “VD” for voluntary disclosure.  If not, we make sure that separate voluntary disclosures are made to reclaim tax to which our clients are entitled.

Crazy?  Maybe Lord Sedley was absolutely right.

And when we are faced with a penalty case on behalf of a client, after establishing the facts (which sometimes help us, but are always needed), we are left with taking a legalistic approach: –

  • Did HMRC properly consider whether the taxpayer had taken reasonable care? 
  • What evidence is there of reasonable care having been taken (effectively, a “compliance audit”?).
  • Did the taxpayer believe that his or her advisers knew what they were doing? 
  • Does the taxpayer have any “special knowledge”, meaning a higher threshold to show reasonable care?  And has HMRC used an arbitrary threshold?
  • Has HMRC applied discretion where the law provides for it?
  • Are the penalties capable of being suspended? 
  • Why wasn’t suspension offered by HMRC? 
  • And even whether the assessment as to penalty has been properly made and in time?

In the meantime, I now need to start ferreting my way through Hansard to establish Parliament’s intention.

Now there is an asylum!

Steve Botham

Does my bum look big in this?

I am persistently asked two questions about Brexit by clients and advisers based outside the UK:

  • what is going to happen and
  • why did the UK electorate decide to leave the EU?

These have become the impossible questions.  To my mind they stand alongside that question no husband can ever answer – “Does my bum look big in this?”

Interestingly understanding the reasons why the UK voted to leave the EU could be the key to getting a settlement.  There is a problem though.

The question on the referendum paper was “Should the United Kingdom remain a member of the European Union?” or “A ddylai’r Deyrnas Unedig ddal i fod yn aelod o’r Undeb Ewropeaidd?” in Welsh.  That’s it.  That is the sum total of the question and the answer was either “Yes” or “No”.  Not “Yes, because…” or “No, because….”, just “Yes” or “No”.  So, despite the claims of many politicians and pundits, no-one actually knows why the UK electorate were in favour of leaving.  Indeed, according to opinion pollsters, the UK electorate is similarly split right now.  Still.

Of course, some reliance has been placed on pollsters as to why people voted to leave.  However, given their recent track record (including on the Brexit vote itself) I think anything they say must be taken with a pinch of salt.  At this stage I would expect UK readers to start on the usual rants from each side of the divide (and it is a divide) with comments such as the people were not told the truth or the Remainers didn’t make their case, or experts can’t be trusted.  But that really does not help us, bar being able to confirm that there is absolutely no clarity as to the reasons, and less as to how these are being addressed by the Brexit process.

I think that there is some common consensus that the main reason for the UK voting the way it did was immigration.  And indeed, that is a live issue in many other EU member states, although perhaps not so much because of the movement of EU citizens to those countries.  From what I understand the arguments elsewhere in the EU are similar: –

  • “They’re taking our jobs and driving down wages”;
  • “They’re living off our benefits” (not quite sure how 1 and 2 interact except in the case of workers paid pitifully low wages);
  • “They’re filling up our schools”. Well there is no doubt the UK education system is under pressure, but one wonders whether it is purely down to immigration; and
  • “They’re using up resources in the health service making it difficult for us to get treatment.“ There is no doubt that the NHS is under pressure in the UK, but little evidence that it is to any major extend due to immigration.

Perceptions matter, and these seem to have been the drivers as regards immigration.  As the UK is now finding out, taking the NHS as an example, the NHS is very reliant on staff from other member states.  There is now net migration from the UK of NHS staff from the EU, and fewer job applicants from other EU member states.  Migrants to the UK tend to be younger and have less chronic illnesses, but it is fair to say they tend to bear children and thus take up resources in that respect.  But the real pressure on the NHS seems to come from older patients, especially when it comes to “bed blocking”.

Close behind, certainly as far as the politicians are concerned is “taking back control”.  Now I do accept that readers from elsewhere in the EU may find this rather incredible, not least because of the special deals available to the UK from the EU. However, once again, this seems to be an issue echoed in other member states, so it is not just a British issue.  Whether it is fair or not is neither here nor there.  What is relevant is the perception.

And perhaps next, is the view that the EU costs the UK “too much”.  Whilst the politicians leading this argument were not very good at their sums (promising £350m a week for the NHS from the savings achieved by leaving the EU), the net cost to the UK is estimated as £200m a week. That does not take into account the new costs arising from protecting our borders, new tariff barriers to be passed, new agencies that will have to been put in place and the administrative cost to commerce in the UK of leaving.  Now we all know that when the UK leaves the EU, someone else will have to find this money or else EU budgets will have to be cut.  And it is now too late to clarify what other benefits the UK gets for the sum of approximately £10bn a year (about the cost of an aircraft carrier without the aircraft).  Certainly, a big benefit is being a member of the Single Market as well as the Customs Union, but in the UK those terms have become as bad news as “Brussels” or “European Parliament”.  A dwindling assertion is that the UK will be better off outside both the Single Market and the Customs Union – it is starting to suffer like the death of a thousand cuts principally as jobs are lost from the UK and relocated in other member states.  However, it is still an assertion that many politicians from across the board, as well as many of the electorate, cling to.

And this last point does also have some echoes politically in Germany and France in particular – the big budget contributors.

And therefore, I say that the Brexit solution requires an understanding by the negotiators as to why the UK is leaving.  That may help colour their positions so that they can get closer to a solution.  And it is also why I argue that the Brexit solution is almost certainly of as much relevance to other member states, principally France and Germany, as it does to the UK.  There are aspects of the EU that do need to be addressed.  Whether Brexit is the right way of bringing the issues to the boil is another question.  And here I must lay some blame at the feet of the Commission and of other member states.

Prior to the referendum, Mr Cameron, who was then the UK Prime Minister (and whose political career was ruined by the Brexit decision) met with the EU in the Spring of 2016, before the referendum, and sought reform.  Put more bluntly he sought help so that he could set the referendum in the best possible light.  He brought sovereignty, migration, welfare benefits, economic governance and competitiveness as issues where reform was needed.  He got no meaningful help.  Indeed, he returned to the UK with an offer which the UK Public and Parliament saw as no different to the assurances Mr Chamberlain was given by Germany in 1939 – I do appreciate that some readers may find that offensive, but that is the reality as to how this was seen in the UK.  That was the perception gained by the UK electorate and Parliament.  And that was to then, in my opinion, play its part in the result of the referendum.  Many British people felt let down by the EU at that crucial stage.  Yet what Mr Cameron was seeking was no different to issues faced by other member states.  And as we now know, it seems that these were important issues for the UK electorate.

So, coming back to the first question – what is going to happen or where are we likely to end up with Brexit?  Well, if you were to put yourself in the shoes of the UK negotiators, you will see that they very much have their backs against the wall.  They really need some help from the EU here.  I do not believe we are talking about flexibility and creativity, as we are told by the UK Government.  I think that the other member states need to take stock, address the issues, many of which are common to other major member states, and then address reform.  The chance of achieving reform within the Brexit timetable is pitifully low.  There may be more chance of doing so within a reasonable transitional period.  And this would not be giving in to the British.  After all, the UK is now pretty certain to leave.  However, that may enable the UK to leave with a deal as opposed to crashing out which is of much good to the remaining member states as it is to the UK.

However, you may wish to ask yourself how likely it is that reform on key issues affecting mainly the larger member states can be achieved even within say four or five years?   And that is why, right now Covertax is preparing for the UK crashing out with no deal, but hoping that common sense will prevail.

And taxation.  Well taxation follows trade.  And commerce much depends on the trading terms between the counties.  And if you wish to be even more narrow, the EU is moving forward with modernising VAT and we don’t even know whether the UK will move forward with the same reforms.  There is a chance that it will not.  That then means a risk of different basic VAT systems in the UK and in the rest of the EU, leading to uncertainty as well as added cost for commerce.

So right now, the Brexit bum does look big in this.  Indeed, it may be better off trying to wear a tent.

The Warwickshire Dylan

The village idiot is sat on his bench watching the traffic go by the duck pond when a rather super car glides up next to him.  The window slides down and out pops a chappie’s head.

“I say, Dylan, do you know the way to Stratford?”

The village idiot paused, thought.  And then thought some more before he replied.

“I wouldn’t start from here if I were you.”

Now that may not be the most amusing anecdote, but it describes a position I encounter frequently when dealing with enquiries, whether from clients or those initiated by HMRC.  They tend to come in front of me starting with an assertion.  And when I check, quite frequently the enquiry has started from that assertion, and I wouldn’t start from there.

There are differences.  As a rule, clients tend to be content to accept that it is an assertion, go back to the real start of their journey and then explore the trip based on the facts.  After all, unless there is user error, a Satnav doesn’t start your journey miles from where you are (although mine does sometimes change its mind mid trip and try to take me somewhere else!).

With HMRC it tends to be difficult to get them to move away from their assertion, no matter how far from the real starting point it begins.  Sometimes this is not their fault.  The taxpayer may have started with an assertion and then not addressed the full facts.  It is still, however, difficult to get the idea out of the taxman’s head.  Sometimes they start their enquiry though with that assertion sitting in their head.  They may not admit that, would be horrified that I think that, but they do.  And once again I don’t blame them and can even empathise – my twelve years in Customs & Excise is a long time ago now, but I remember how we were trained; “they’re all at it, you’ve just got to find out how”.

My job, from a telephone enquiry, right through to a Tribunal tends to have three elements.  Establishing the facts.  Applying the law.  And then providing or arguing an opinion.

The first and the most important is establishing the facts.  You cannot seek to apply the law without full knowledge of the facts – and that applies equally to clients and taxmen.

Frequently this is not an easy task and it is not unusual for important facts to be omitted.  My clients’ typical comment is that “Oh, I didn’t think that was important”.  But sometimes it is more sinister.  For example, on a recent Alternative Dispute Resolution (“ADR”) case, it came out at the meeting that HMRC had withheld evidence from the taxpayer and us.  Indeed, this case is in Tribunal, and had diverted into ADR to clear the ground, and this evidence was not available to the Tribunal either.

So, there is a world of difference between instances of difficulty establishing the facts going from ignorance right through to withholding of evidence.  Which is why I spend a lot of time dealing with assertions.

Which reminds me….

The village idiot is sat there after a few pints at the pub over the duck pond when another rather super car glides to a stop and another chappie’s window slides down.

“I say, Dylan, can you tell me the way to Stratford?”
Dylan pauses, pauses a bit more and asks, “How do you know my name is Dylan?”
“Oh” said the chappie “I guessed”.
“Good” said Dylan “Guess the way to Stratford”

Steve Botham
Warwickshire

Brexit – What about the people? All about social security (NIC)

Following her first article about Brexit and its effect on personal income tax, here is Melissa Dunkley’s second article in the series which looks at social security (what we call NIC in the UK). 

Melissa’s company, MD Advisory Limited, is a specialist tax adviser, dealing with the tax and social security position for expatriates.  She advises on both UK nationals going overseas and foreign nationals coming into the UK.  Email her at: melissa@mdadvisory.co.uk

In the first article of the series we looked at personal income tax for UK nationals working in the EU and EU nationals working in the UK, and concluded that Brexit would not change much. So now let’s look at social security (what we call NIC in the UK).  Will that be affected?  OMG, yes!

I’m not going to focus on the availability of maternity pay or job seeking in another EU country. These are articles focused on workers and their employers. There are a lot of them out there who are correctly paying into the relevant tax and social security systems and they didn’t get much of a mention during the referendum or since.

For employers, social security is simply a cost. They have to contribute the employer’s percentage and get nothing for it except a corporate tax deduction. For employees, social security typically equates to little more than entitlement to a state pension. Let’s set the record straight on one thing before we go any further, entitlement to use the NHS does not come from paying NIC. The NHS is funded for the most part by the tax system and you are entitled to use it if you reside in the UK.

So, if you are a UK national going to work in the EU or an EU national coming to work in the UK, do you pay NIC or the other country’s equivalent? What does it do to your state pension?

The answer is you follow the rules in the social security agreement that exists for members of the EU (and EEA countries and Switzerland). Put simply, that agreement says that you pay in only one country at any given time and it should be the country in which you work, unless it’s a short time secondment (up to five years), then you can apply to stay in your home country’s system.  If you are working in multiple EU countries at the same time, there’s a set of rules to say which is the one and only country in which you pay.  The employer always pays in the same country as the employee.

Once Brexit happens, the UK is no longer in the EU and is no longer party to this agreement. Therefore, unless some special agreement is reached during the Brexit negotiations, one of two options will happen.
Before the UK joined the EU, there were individual social security agreements between the UK and some EU countries, France and Germany for example.  We could revert back to these but these haven’t been updated since before the UK joined the EU, so they’re in need of some work.  Besides which, has anyone still got a copy?  Remember also that at the time the UK went into the EU, a country called Yugoslavia existed, so there are a lot of EU members with whom no old social security agreement exists because they didn’t exist back then.

The other option is that we simply operate the rules that exist for nationals that come from other countries, with which the UK does not have a social security agreement, and there are many of those. In this scenario a UK national going on secondment to another EU country would most likely continue to have to pay NIC for the first year. They would also be liable to pay in the other country according to that country’s own rules. So that’s double “taxation” and there’s nothing you can do about it. If that EU country is France, that’s 12% UK + 20% FR for the employee and 13.8% UK + 48% FR for the employer, give or take.  So, you might get a pension in the future but you’ve got nothing to live on today.

And what about the state pension?  Most countries have a system whereby you have to contribute for a minimum number of years to get any pension at all.  In the UK the minimum is currently 10 years. Without the rules contained in the EU social security agreement, if you worked and paid in for 40 years but in five different EU countries, you would not get a state pension from any of them unless you reached each country’s minimum number of years.  However, the EU social security agreement contains provisions whereby you consider the contribution period across all member countries, i.e. 40 years, so that you qualify.  You then get effectively a proportion of the full pension from each country in which you’ve paid.
The other important point about pensions is inflation protection.  A UK resident receiving a UK state pension has their pension amount increased each year in line with whichever inflationary measure the government adopts.  Due to the non-discriminatory rules of the EU, an EU or UK pensioner living in the EU also gets the same inflationary increases each year.  However, a pensioner living in any other country does not.

If you retired today on the new basic pension of £159.55 a week, you would get the same £159.55 a week for the rest of your days.  If you don’t think £159.55 will buy you much today, imagine how much it won’t buy you in 20 or 30 years.

So, in summary, will leaving the EU have any effect on NIC?  Most definitely, yes.  Have we had any information yet about what might happen post departure? No.

My crystal balls are useless

I collect glass balls – paperweights mainly.  Some are crystal, but they are totally ineffective when it comes to looking into the future.  Especially so when I am asked by clients trading internationally where the UK is headed with Brexit.
March 2019 is not a long way away and in business planning terms 2021 is pretty close too.  If you were planning to build a factory to service the European market you’d like some idea as to where best place it.  And I now know that the UK is not necessarily ruled out by the prospect of Brexit, but that it is an important factor.

Part of my problem with Brexit is that the politicians keep blowing with the wind and stabbing each other in the back – on both sides of the English Channel.  In the UK, we don’t know at all what the Government’s Brexit will look like or when it will really be implemented.  And whilst I have had complaints about the political nature of some of my articles, politics is at the heart of this issue and taxation is never divisible from politics.  VAT in the UK was a consequence of the British political decision to join the European Community, as we then called it.  Even more appropriately, looking back, it was introduced on April Fool’s Day 1973. Hence some political awareness is necessary to try to divine what might happen.

Right now, the UK has asked the EU for a two-year implementation period, although nobody has told us what is to be implemented.  Of course, the EU could just say “no”, except we know the western Europe’s states have similar problems to the UK in that, for example, they do not have a Customs infrastructure to cope with Brexit at March 2019. The French for example are relying on a new Customs computer system, which the UK will use too, being delivered on time (work on it started way before the referendum but not in anticipation of the result). Somehow the French must recruit, train and house about 5000 extra customs staff, as we do. And then a similar number of customs agents will need to be recruited and traditionally they have come from National Customs services. So, it is going to be very hard for all states with an active border with the UK.

The UK has also suggested to the EU we stay in the Customs Union and the Single Market until Spring 2021 i.e. no change until 2021.  Provided that the remaining EU member states agree this proposal.
My best guess is that is exactly what will happen until 2021. The EU has as much chance of being ready by 2019 as does the UK. We could all be silly and wreck trade between the UK and the rest of the EU, but that would do as much economic damage to France, Germany and Holland as would be inflicted on the UK. In my opinion, the EU budget could not stand that, leaving the remaining member states in crisis.

After that is more difficult because politically the current UK Government must take the UK out of the Single Market and the Customs Union at that stage. It must abandon other trade structures such as EFTA and EEA because it has managed to mix them up in the public’s eye as being the EU. But it now knows the UK would be in a trade wilderness if we did that. And the UK could have had at least one change of Government along the way.

We have heard the UK politicians telling us that what will come will be different but have the same benefits. I think the EU politicians know what this means too.

I think the UK will seek to create a free trade area including the EU and countries like Norway, Switzerland and Iceland. It won’t be called the EEA because that is politically bad, it will be “new” but the same. I think that the Customs barrier will sit outside this new free trade area just as it does now. I can also see that within the new free trade area we will find harmonised indirect taxes which look remarkably like those of the Single Market, but it will be new and the UK will have a big say, just like it does now, but it will be different and better because it is not called the Single Market.

I think this brand new and much better body will negotiate trade deals with third countries just as the European Union does now, but it will be better allowing the UK to trade freely with the rest of the world, just as it does now (check out the tables published by the BBC recently).

I think this new world will take at least seven years to be agreed between the parties. In the meantime, the UK will blame the EU for terrible delays, the EU will blame the UK for not doing its homework and they will all agree to extend the implementation period which is not a transitional period.

So, nothing will change for seven years, but then it will be different but the same.

Of course, these new bodies will have to have their administrations somewhere else, possibly Madrid because the weather is so much better there.
And sadly I am not joking. The EU does not want the UK out and that body understands the art of compromise and finding solutions. Within seven years the UK may have once again found that art.

In the meantime, I suggest you read Machiavelli (the machinations), Nineteen Eighty-Four (the art of Newspeak and “Oceania”) and 1066 and All That (for the logic), and you’ll be as enlightened as any Government minister as to what is really happening.

You may gather that I am very cynical. I also do not believe I will be far off the mark.  But bear in mind that my crystal balls are useless.

Magna Carta and all that

Florence and the Magic Roundabout

I’m not talking about the Magic Roundabout, albeit there are similarities, as you will see, but the speech of the UK Prime Minister in Florence, Italy on Friday 22 September 2017.

For our clients doing business in the EU there was some good news and a big lump of no news.
Just to put this note in context, I am talking solely about UK proposals made by the Prime Minister in a speech and not even put to the other EU member states. This is not therefore agreed, but is well placed to be acceptable to the other EU member states.  If you are following Brexit from outside the UK, you may ask why we are unable to provide some clear messages.

There are three main reasons:

  1. In fifteen months, nothing has been agreed between the EU and the other member states except that the UK is leaving the EU.  This does not mean the UK must leave the Single Market (the free trade area) or the Customs Union (the trade barrier around the EU).
  2. The UK has only published position papers, proposals, which have little detail, and none of which have been agreed with the other EU member states; and
  3. UK Government ministers do not sing from the same hymn sheet, leaving the Prime Minister constantly undermined, and business having no certainty where the UK is headed.

The good news was simple:

  1. The United Kingdom accepts that it will not be ready for Brexit by the end of March 2019 (when it is due to leave the EU).  This will not come as a surprise to businesses, as the mountain to be climbed is huge, but it is very unusual for a politician to be so frank.
  2. The UK would like an “implementation period” of two years to get itself ready to leave.  This would mean leaving in 2021.  From what I can gather an “implementation period” is the same as a “transitional period”, which has previously been dismissed, but is more acceptable to the UK as it is our own idea.
  3. The UK would like to stay in the Single Market during the implementation period.  This is a change of heart as ministers had previously been adamant the UK would leave at the end of March 2019.  Massive credit again to politicians willing to be so frank.
  4. The UK would like to stay in the Customs Union during the implementation period.  This is also a change of heart.
  5. The UK would permit some interference from the European Court during this implementation period.  This too is a change of heart, but there is no detail as to where the UK would seek to curtail the court’s remit.  It is possible that the UK may decide not to curtail the court’s remit or even that the UK will have left by the time it makes a decision.
  6. The UK would continue to permit free movement of people during the transitional period, but may introduce a registration scheme which is already permitted within the EU and used in some member State.  There is no infrastructure for such a registration scheme in the UK. Quite when such a scheme will be ready, if ever, is anyone’s guess.
  7. The UK is now welcoming workers from other member states who are already in the UK and no longer has any intention other than to treat them exactly the same as they were treated before the referendum.  The implication is that they will not be thrown out of the UK, which is good news for the UK given the tens of thousands of EU workers who have left since the referendum.  Perhaps the UK may be able to attract some of them back as their loss has put particular strain on hotels, catering, agriculture and, most notably, the National Health Service.  Clearly acceptance of the remit of the European Court of Justice during the implementation period is essential to maintain the UK’s obligations.
  8. The UK will continue to honour its financial obligations to the EU during the implementation period.

So, this is all good and, to be fair both what business has asked for and, given the admission of being unable to meet the original Brexit deadline, common sense.  However:

  1. These are the UK latest set of proposals are nothing more than that.  Yet M Barnier, if not at least one of his senior contemporaries, seems to have seen it as a move in the right direction.
  2. Whilst the “implementation period” is proposed, just what will be implemented has not been set out.  We have various visions from leading ministers, some of which are conflicting, but no hard proposals.  We do not know what Brexit Britain will look like.  However, the frankness of the UK Prime Minister means that we do at least have an extra two years to find this out.  So, whilst Brexit means Brexit has not really changed, because we never knew what it did mean, clearly the rules we are playing to have at least been modified.

I also pay attention to language.  “Transition period” is a term used by the EU.  “Implementation period” may well be the same thing, but changing its name means it is part of Brexit.  We now know that eventually the EU is to leave the Single Market and the Customs Union, but we have heard previously that what replaces them will also be very similar, but will have different name.  And that may also be true of the name of the governing court or courts.  So maybe we’re on the threshold of the UK moving away from the EU political and Economic Union, but staying in a newly named free trade zone which includes the EU member states and other nations such as Switzerland and Norway.  It might look quite similar to what we currently have, but without the UK having any direct political and economic say within the EU.  It may mean that.  It could of course just be political posturing, which is not good for business.
In the meantime, assuming that a deal can be done for an implementation period, I do have some VAT and Duty questions, which some may say are silly.  However, those of us long in tooth know that silly questions sometimes get silly answers:

  1. Are we still leaving the EU at the end of March 2019?  We’ve indicated we will probably be staying in the Single Market and the Customs Union, but they are not the same as the EU.  Leaving the EU means losing political and economic decision-making power, but still having to abide by any new rules brought in place regarding the Single Market and the Customs Union amongst other things.  Leaving the EU may mean losing some of the benefits and rights of EU membership.
  2. Will UK firms be able to trade freely with the remaining member states and vice versa?  Will the non-discrimination laws continue to apply?  Will a UK company doing business in Germany still be treated the same as a German company trading in the UK, and vice versa?
  3. Will all the current VAT simplifications for intra community trade continue to apply?
  4. Will we still have European Sales Lists?
  5. Will VAT fraud information still be shared with member states, and vice versa?
  6. Will we continue to complete intrastat returns?  Will they continue on the same basis or do we fear greater reporting obligations against smaller thresholds for example?

I’d like to assume that the answers to all those questions and more will be that we continue as we are after the end of March 2019.  However, you can see why I’m asking.
So following Florence, the Brexit Magic Roundabout will continue to turn.  Florence will still look to lead whilst she seeks to find her way.  Presumably Mr Davis will crank Mr Rusty’s organ. The whole lot will continue to take what Dylan does, man, whilst the process continues to move at Brian’s pace.  As for Dougal, he seems to have dropped out of sight with Ermintrude after that article she wrote in the Telegraph a little while ago.
For my French friends, please feel free to substitute your own names, bearing in mind that the UK version had a different storyline to the pictures which you produced.  Plus ca change!
Time for bed said Zebedee.