Brexit – Render to Caesar

Some years ago I used this quote only to be brought up short by my former business partner, Tony Borman, who knows his bible, and he asked me to read that part in full. I’m not a religious man, but I was intrigued by the text: –

“And they sent to him some of the Pharisees and some of the Herodians, to trap him in his talk. And they came and said to him, “Teacher, we know that you are true and do not care about anyone’s opinion. For you are not swayed by appearances, but truly teach the way of God. Is it lawful to pay taxes to Caesar, or not? Should we pay them, or should we not?” But, knowing their hypocrisy, he said to them, “Why put me to the test? Bring me a denarius and let me look at it.” And they brought one. And he said to them, “Whose likeness and inscription is this?” They said to him, “Caesar’s.” Jesus said to them, “Render to Caesar the things that are Caesar’s, and to God the things that are God’s.” And they marvelled at him.”

So even within a religious context, there is an obligation to pay taxes according to the law, but no more – which is of course a principle we can all agree with.

And since taxation began, there has been a mechanism to collect taxes, even if it was at times at the point of a sword.

Mutual Assistance Legislation

One important mechanism to collect taxes cross border is the Mutual Assistance legislation.

You may well wonder what this is, and unless it is has been used on your business, it is quite reasonable to never have heard of it. This is legislation within each EU Member State requiring that Member State to collect tax on behalf of another Member State.

So, for example, a German company which should have paid tax in the UK, say on construction activities, does not do so leaving the UK (HMRC) to contact the German tax office for them to collect the tax on behalf of the UK. Or a UK company trading in France fails to pay its taxes, and the French Government can require the UK (HMRC) to collect the tax on behalf of the French.

You may be horrified at this intrusion, but if you think about it, in the UK get annoyed enough about foreign drivers not paying their parking fines, so why not ensure that your taxes are collected – after all, every £ or € of tax not collected is a £ or € more for other taxpayers to pay.

So what is the problem?

At the moment, the UK is aiming to leave the Single Market and, as explained in a previous article, this could result in more EU businesses having to register for VAT, and pay VAT in the UK, as well as more UK businesses having to have VAT registrations in other member states, and pay tax in each of those countries.

Whilst most businesses will play by the rules, and render unto Caesar the things that are Caesar’s, some won’t, either deliberately or through ignorance. The natural recourse is then to fall back on the Mutual Assistance legislation, but that legislation is likely to go when the UK leaves the Single Market.

So just when a country really needs the Mutual Assistance legislation, it will no longer be available.

So where do I think this will go?

I think it is going to be an important political football within Brexit. Why?

Simple, it is about which Government gets to collect the tax money – or not as the case may be. It could result in agreements being made between the major economies as that’s where the bulk of the money will be. But the smaller countries could well object to that. Hence it could take some time to be resolved.

The usual solution as far as the EU is concerned is to have an interim or transitional period. Frequently these transitional periods become the permanent solution, as we saw in VAT following the completion of the Single Market in 1992 – i.e. it didn’t get completed and the pretence of the transitional period was dropped many years later.

The problem from the UK perspective is that our Government has indicated it would resist a transitional period – that said, there’s an awful lot of water to go under the bridge until 31 March 2019.

So, who will be Caesar after 31 March 2019?

So, right now, on tax, we know that all the existing EU rules will drop away, and will need to be replaced with something else, and we also know that even if that is resolved, the ability to collect tax from businesses in another Member State is also at risk.

Do I think all of this will be resolved by 31 March 2019? No I do not.

Do I think that there will be a transitional agreement? Yes I do, but not necessarily on all issues.

In the meantime, businesses need to plan on who Caesar will be from 1 April 2019. And right now, it seems even the parties to the negotiations do not know. This is not helpful for business.

Steve Botham

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.

International trade – the Single Market free trade area

That may seem a peculiar title, given the hype in the UK over the Single Market, but that is why Mrs Thatcher was so supportive of it at its inception, through the signing of the Maastricht Treaty on 7 February 1992.

The Single Market is about free trade, not just removing tax barriers, but also removing hidden trade barriers – for example, individual countries with peculiar labelling requirements aimed at protecting local businesses. It has got nothing to do with myths like straight bananas, but it does mean common standards across the EU, many of which are for the protection and safety of consumers.

On 1 January 1973, Ted Heath’s government took the UK into the “Common Market”, something which UK politicians and commentators now hark back to with rose tinted spectacles as a free market. It was not a free market. There were a lot of barriers to trade including tax rules and more hidden blockages to trade. The Common Market needed urgent reform which is what led to the Maastricht Treaty. One of the changes that the UK drove was the free movement of labour, as to date there had been significant border controls for not only goods, but also people. Please note the time scale.

Like many UK VAT consultants in 1991 and 1992 I was heavily involved in getting ready and implementing the changes that arose during the formation of the Single Market. I remember speaking at a couple of major CBI events pointing out some of the negative aspects and Intrastat, which had, and still has, criminal sanctions, and was to be used to compile cross border trade statistics. I argued it was an unreasonable burden on business, could be achieved just as accurately by statistical sampling of a smaller population of businesses, and a criminal sanction for trade statistics, which were already notoriously unreliable, was just plain unreasonable. I still hold those views.

However, my main concern was the VAT rules, where we had some big changes to make trade in goods, and to a lesser extent, trade in services easier between member states. The aim was to remove the burden of VAT on cross border transactions – in other words treat the whole of the EU as a single market so you could sell just as easily to Madrid as you could to Manchester.
Sitting around the Single Market was the trade wall created by the Customs Union. Here businesses from outside the EU had to knock on the door, ask to come in and then pay an entrance fee to gain access to the market.

There have been revisions over the last 25 years, but largely it has worked well so that a massive amount of UK goods and services are exported to other EU member states.
Politically, in the UK, the sticking point is not having the free trade area, but the movement of labour within it. I won’t go into the arguments presenting themselves over the last year or so, but anyone with a need for labour, whether cheap or skilled, will understand the UK’s need to bring this labour into the country. Similarly, skilled UK people work in the rest of the EU. And of course, EU companies, when selling goods or services to other EU countries may need to send staff there to do the job, and the free movement of those staff is essential to getting the job done.
So, the question is, what will happen after Brexit, now less than two years away unless the UK sees sense and accepts the offer of a transitional arrangement? I say that partly because the UK is intent on a basis of negotiation that no deal is better than a bad deal (I’ve no idea what the parameters are for a “bad deal”, and nor does anyone else as far as I can see) and partly because I know and understand the timescales required to make changes in the EU, the political arguments that are made, and things being held up because a smaller state, or even region, as in the case of Walloon in Belgium during the negotiation of the Canada/EU trade agreement, wants something that may not be at all connected with the issue at hand – it is a bargaining point for them. That latter issue may be a fault with the way the EU is organised, but it will only be changed from within.

So, having set a more accurate scene, what will happen when the UK leaves the EU? Well the first point is that the current UK Government, which is likely to be returned in the General Election on 8 June 2017, is likely to retain its determination to leave both the Single Market and the Customs Union. The UK will be knocking on the door. It will have to pay to get in, and that may be in terms of a national bill, or duty paid by importers of goods, or both (more likely).

When doing things inside the EU, including performing services, installing or assembling the goods you’ve sold, keeping customer stocks – the list goes on – if “simplifications” cannot be agreed, UK companies would have to register for VAT in at least one EU country, and for those trading EU wide, all of them. Similarly, EU suppliers of goods and services would have to register for VAT in the UK.

Each would have to comply with the rules in the countries where they have VAT IDs. And local VAT would have to be charged.
On top of that UK suppliers’ staff may not be permitted to travel freely to EU member states, or rules could be applied requiring local staff to be used – and, of course vice versa.
There would be no protection from other “hidden” trade barriers. As regards the hidden barriers, like labelling, even whilst outside the EU, UK businesses would need to adhere to those rules if they want to successfully export to EU member states. Part of “coming out” was to ditch red tape “imposed by Brussels”. Well, the UK may well succeed in ditching some Brussels red tape (I have absolutely no idea what, apart from getting rid of Intrastat which would please me), but it would find that at least an equal volume of red tape for exporters to the EU is created – Intrastat goes (hooray) and exporters of goods have to go back into standard customs clearance procedures which will be a lot more costly and demanding than Intrastat.

You can see why, therefore, business leaders, in the main, have been calling for a “soft Brexit” and if nothing else retaining access to the Single Market, although by implication the UK would need to remain within the Customs Union. One country within the Customs Union is Turkey with whom UK business, endorsed by the Government, entered into a £100marms contract in January 2017. Unless that contract consists of boxes of Lee Enfield rifles capable of being shipped straight away, BAE might find itself with additional costs on the contract. At the time of signing the contract, the intention was that this would open the way to £16bn trade between Turkey and the UK. How will that materialise when the UK and Turkey sit either side of the Customs Union’s wall?
So, what must businesses trading between the UK and the EU do? I think the old maxim of planning for the worst and hoping for the best is about the best strategy, unless you’re big enough to negotiate a sweetheart deal.

So, this provides a glimpse of the issues which both UK and EU businesses face as the UK strides purposefully towards the Brexit finishing line. I’d guess as far as business is concerned, we’d all hope that that is not also a cliff edge.

Steve Botham

International Trade – the Customs Union and the UK

First of all, apologies in advance if we’re teaching our grandmother to suck eggs. However, we thought it would be helpful to set down a “simple” explanation of one of the current issues of our time – the Customs Union.

The Single Market is not the same as the Customs Union.  The Single Market is about trade within the EU trying its best to make trade between EU member states free of Customs Duty, Tariffs and other blockages to trade. The Customs Union is a fence around the EU member states, and a few other countries, and other countries cannot send goods through that fence unless agreeing to play by the rules, which on occasions means paying an entrance fee.

The position until March 2019 is that nothing has changed – the UK is still in both the Single Market and the Customs Union.

However, there already seems to be some confusion as to what happens in respect of issues such as Customs Duty and Quotas for trade between the UK and other countries after Brexit.

Trade between other countries (“third countries”) and the UK continues under existing rules, may be subject to trade agreements between the EU and the third country, and may well be subject to import duties both on goods coming into the UK and on goods going into third countries from the UK. It is also possible that “quotas” may be applied – quotas is a system whereby only a certain amount of goods can be imported within a specific period of time.

It seems likely that the current Government will be returned after the 8 June General Election in the UK. The current UK Government seems committed to leave the Customs Union as well as the EU’s Single Market.

Accordingly, right now, the most likely position from March 2019 onwards is that exports from the UK (which will then be a third country) and the EU, as well as exports from the UK to third countries will, at least for the time being, fall back on World Trade Organisation (“WTO”) rules – the agreements made between the EU and third countries will no longer be valid for exports and imports. And, of course, the UK will no longer have a favourable trading status with the EU.

Similarly countries exporting to the UK will no longer do so under EU trade rules, but instead will also be reliant on WTO rules until and unless trade agreements are made between the UK and that other country which say otherwise. That applies to both EU exporters and third country exporters. Trade agreements between the EU and third countries (the UK) typically take several years to agree. The same is generally true of other bilateral trade agreements.

The EU already has trade agreements with many of the countries with whom the UK Government expects to do more business after Brexit. Those trade agreements will fall away after Brexit. Until and unless new bilateral trade agreements are entered into with those countries, the terms of trade between those countries and the UK will be, in the main, worse than they are now. Hence, somehow, new trade agreements will need to be entered into in record time. Some existing suppliers, say to the car industry in the UK, will be met with trade barriers which will increase the cost of their goods in the UK – that applies equally to EU and third country suppliers – which in turn will push up the costs of UK car manufacturers and assemblers.

The EU does not, and never has, inhibited any member country’s ability to trade with a third country – despite what various UK politicians seek to imply. There are trade embargoes, much as with those arising from membership of the United Nations, and I would imagine that most people in the UK and the EU would be happier not trading with “rogue states”.

However, what is done, as within any trading bloc, or with any country seeking to protect its own market, is that trade barriers are put in place to protect the home market (and they may also raise tax revenue!). Currently the rules are clear (but complex) for both imports into the UK from third countries and exports to third countries from the UK. New rules will be equally clear (but complex) after Brexit.

We know that some large companies intend to advance purchase goods (finished goods and components) from the EU in particular prior to Brexit, and we understand a stockpile of six months goods is typical.

We’re sure that there is much more that needs to be considered for individual businesses, but what we hope to illustrate is that the impact of Brexit on international trade will not be simple, there will be grey areas and nuances, but whilst the UK seems intent on ignoring an EU offer of a transitional period, there could be a significant cliff edge effect for many businesses exporting from the UK and exporting to the UK. It is clear that all businesses need to start planning for Brexit now, if they haven’t done so already (like the ones planning to stockpile).