Brexit so far – I’m on Lucky 7

I will try to summarise the position on Brexit as I see it right now.  I’ll start by saying that some of it appears to be a game of chance leaving the future down to a turn of the roulette wheel as much as planning.

Good news

The latest agreement indicates that we have something settled between the UK and the EU27 taking us through to 31 December 2020.

That can only be described as “good news”.

In or out of the Single Market?

The next part is a little hard to grasp.

The UK is leaving the EU on 29 March 2019.  Strictly it is also leaving the Single Market and the Customs Union (as well as several other bodies) on 29 March 2019.

However, during the “transitional period”, as it is now being called, the UK will be treated as if it is in the Single Market and the Customs Union.  I have no idea whether the UK will remain in the Single Market and the Customs Union, but it has agreed to be covered by the rules of these organisations. That is an important point legally, as tax and Customs legislation as it stands relies on the UK being a member of those institutions and not just treated as a member of those institutions.  Quite a body of law will need to be amended and, of course, that will apply to all 28 current member states.

The UK will continue to obey the laws of the EU, including on the Single Market and the Customs Union, but will have no say in making or changing laws.

The UK will continue to pay contributions to the EU during the transitional period.

There is legislation to deal with transactions which covers the end of the transitional period. At present they seem simple and workable.  Let’s hope they stay like that.

No change then?

So far so good for businesses trading between the UK and the EU27.  It should mean “no change” until 31 December 2020.  So, some certainty.

Or at least that is what I thought initially.

Ireland

We have the issue of the land border in Ireland (and, indeed, Gibraltar it now seems).

The position on Ireland has not changed since 8 December 2017, despite the statements coming from various UK ministers.  The UK and the EU27, principally Ireland, are to try to work out a practical solution.  This means thinking up something new, which relies on technology, and which can be put in place working efficiently by 31 December 2021. And which is agreed upon by all the parties. With the greatest of respect to the Irish from both sides of the border, that would be a tall order in any event and will be all the more difficult to achieve in Ireland.

The UK Government has made some suggestions, but little work seems to have been made otherwise, even to work up the suggestions.

The fall-back position is that Northern Ireland will remain in both the Single Market and the Customs Union.  Whilst that is in black and white in the agreement, there is little doubt it would be unacceptable for Unionist politicians in Northern Ireland, as well as many in the UK Government and official opposition.

Unhappy hard Brexit supporters

Perhaps a more difficult issue with the transitional period is that it could be ended by the EU27 at any stage if the UK does not comply with the rules.

The fact that has been made clear in the agreement is hardly a surprise – even after the Belfast agreement on 8 December 2017, the UK’s head negotiator Mr Davis said the UK would walk away from that agreement if it suited the UK.

And we know that even staying within a mechanism linked to the Single Market and the Customs Union where the UK has no say during the transitional period is an anathema to hard Brexit supporters.

In the meantime, there is strong opposition to the agreement from hard Brexit supporters in respect of, but not restricted to, fishing rights.

Some hard Brexit supporters have expressed their opinion that the agreement sells them down the river – quite how that will manifest itself over the coming weeks is hard to tell.

Given the UK’s track record since the referendum, there is therefore a risk that the UK could create an early end to the transitional agreement.  There lies the uncertainty for businesses trading between the UK and the EU27 during the transitional period.

Clarity on tax rules in the UK and in the EU27?

In the meantime, I look forward to HMRC (the UK tax department) providing clarity on which legislation and which administrative arrangements will remain in place after 29 March 2019.  This is important.

Equally important is what the environment will be for UK businesses trading in other member states.  Will it remain the same?  It should, but we don’t know for sure.

What do we think of it so far?

So, how I see it is that some good progress has been made, but there is a long way to go before we know what is happening from 29 March 2019 until 31 December 2020.

In the meantime, what will happen from 1 January 2021 remains shrouded in mystery.

We know the UK aspiration is for the UK to have a parallel administrative, taxation and regulatory environment to that of the EU27, in the hope that whilst being outside of the Single Market, the Customs Union and the EEA, as well as various EU bodies, trade between the EU27 and the UK will continue as it does now.  If that can be achieved, it will be an incredible achievement by all concerned.

But we already know that both in the UK and the EU27 that is probably a step too far for most.  For example, issues related to the European Space Agency contracts have had the UK crying “foul”, whereas it seems clear that the UK chose to leave the EU and as such it should have expected that it would lose access to that market.

So, fingers crossed – our “plan for the worst and hope for the best” strategy remains intact.  In the meantime, my money is on lucky 7.

Steve Botham

VAT After Brexit – Installed Goods

Assuming a deal cannot be done, the UK will sit outside of the Single Market and the Customs Union. Even if a deal is done, the UK Government is currently adamant it will sit outside of the Single market and the Customs Union.

That means we will see changes on contracts involving the supply and installation of goods. My view is that these changes will both increase red tape and costs for both suppliers and supplied.
I will use the UK as an example of how things work now. Please remember that each member state has its own administrative requirements.

The law throughout the EU at present

To quote from the Principal VAT Directive: –

“Where goods dispatched or transported by the supplier, by the customer or by a third person are installed or assembled, with or without a trial run, by or on behalf of the supplier, the place of supply shall be deemed to be the place where the goods are installed or assembled.”

The effect of the law

So, if a business in the UK contracts with a Belgian supplier to provide installed goods, then the place of supply is the UK, and the tax must be accounted for in the UK.
The default position in the UK is that the supplier MUST register for VAT and charge local VAT.

However, there is a simplification solely for intra-community supplies whereby the supplier can notify HMRC that the recipient of the supply will reverse charge the supply – i.e. no UK VAT ID needed by the supplier. The notification MUST be sent before the first invoice is issued on EACH contract.

In other member states the system is somewhat simpler – an intra -community supply in similar circumstances is treated as a reverse charge (but check!).

However, suppliers from outside the EU are required to register for VAT in the UK and to account for VAT in the UK, subject to a simplification mentioned later.

What is “supply and installation”?

This aspect of the tax also causes problems, especially in the UK, as the dividing line between “supply and installation” and “supplies related to land” – broadly construction – are at best grey, despite clarification at EU level.

Because of inconsistency on the interpretation of what is and what is not the supply and installation of goods, the EC issued a binding regulation with definitions.

They said: –
“For the application of Directive 2006/112/EC, the following shall be regarded as “immovable property”:

(a) any specific part of the earth, on or below its surface, over which title and possession can be created;
(b) any building or construction fixed to or in the ground above or below sea level which cannot be easily dismantled or moved;
(c) any item that has been installed and makes up an integral part of a building or construction without which the building or construction is incomplete, such as doors, windows, roofs, staircases and lifts;
(d) any item, equipment or machine permanently installed in a building or construction which cannot be moved without destroying or altering the building or construction.

“Immovable property” is what we treat in the UK as “land and property”. Items c and d are the important ones for supply and installation purposes. If the supply complies with these descriptions, then it is construction services (for UK VAT), and if it does not it is the supply and installation of goods. There are still grey areas.

UK simplification for suppliers from outside the EU

As regards the simplification, it does NOT apply to suppliers from outside of the EU. This will also be the position post-Brexit if a deal is not done to cover this aspect of the tax. HMRC summarises a one-off concession: –

There is a more limited simplification arrangement for installed or assembled goods imported from a third country. So long as it is a one-off supply the supplier can exceptionally treat the supply as taking place outside the UK. This requires the customer to act as the importer of the goods and the full contract price to be declared on the import entry.

Now there are two things that stand out.

The first is that it is a one-off arrangement. Thus, it can only be used by the SUPPLIER once. If the supplier has more than one contract in the UK, then it cannot use the arrangement. It must therefore register for VAT in the UK, and charge local VAT. At the moment it is not clear whether businesses from the EU27 will be permitted to use the UK VAT Agent route or else be required to appoint a tax representative. Tax representatives are harder to find, because they are jointly and severally liable for any tax due the fees for representation tend to be higher, and they may also want a bank guarantee to manage their risk. Reciprocal issues will need to be managed for UK businesses with supply and installation customers in the EU27.

The second is the mechanism. The sale of goods is treated as being made outside the UK (usual contractual issues apply, including which court is to be used for disputes, for example) and then the full contract value is used at importation. So that mans the value of the services is added into the value of the goods, as well as the other cost additions (CIF for example), to create a value of duty (more duty duty) and then the value for VAT. Higher VAT will be due by the importer, creating a greater demand on cash flow – but see my earlier article on possible ways to manage this- and a higher guarantee needed for deferment (additional bank charges).

UK Suppliers

Quite how the EU27 intend to manage the issue is not known at this stage, but I think UK suppliers would be sensible to plan on the basis that they will have to get local VAT ID’s anywhere they install or assemble goods in the EU27.

EU27 suppliers to the UK

Indeed, I think it would be sensible for EU27 suppliers to the UK to think in terms of obtaining a local VAT ID as I cannot say whether the concessionary treatment will survive Brexit.

The UK VAT registration process

Just a final few words about registering for VAT.
Covertax has prepared a lot of VAT registrations in the UK for supply and installation contracts. They take time. Lots of questions are asked. HMRC needs to satisfy itself that the contract is not one that can be reverse charged.
We’ve even had issues on EU VAT refunds, where the contract was reverse charged, but one part of HMRC refused the refund as they thought there should be a local VAT registration in place and the VAT Registration Unit refused registration because it thought that there should not.
So please do not leave it until the last minute. Start planning now. The HMRC VAT registration service norm is around six weeks presently. That will increase significantly as Brexit draws closer – more registrations will be needed in the UK and as far as I know, no extra resources have been deployed by HMRC to address this. I suspect waits in excess of three months will not be a surprise towards the end of this year and during 2019.

Construction Industry Scheme (“CIS”)

Further complications arise in the UK as most supply and installation contacts, even where covered by a VAT simplification, also require registration under the Construction Industry Scheme – a withholding tax scheme. Look into that early as failing to do so could result in up to 30% of your invoice value being withheld.
At present, it is possible to gain “Gross Payment Status” – you get paid without stoppage – provide you have a good tax compliance record. HMRC cannot discriminate against companies from other member states, and so will take into consideration evidence produced as to the EU27’s tax compliance record.
We do not know if that will continue after Brexit. If not, the cost of doing supply and installation business in the UK will increase for many EU27 businesses.

So, we need a deal?
Of course, a deal might get done to avoid all of this cost and red tape for businesses. One can but hope.

Steve Botham

VAT: Consignment and Call Off Stocks Post Brexit

At the moment, whilst the UK is a member of the Single Market and sits within the Customs Union, the UK benefits for call of stock and consignment stock simplifications for intra EU transactions.  That’s both for goods coming into the UK from the EU27 and to the EU27 from the UK.

In brief, in the UK call off stocks (roughly, stock under the control of a single customer) do not require a local VAT registration, whereas Consignment stocks (roughly, your stock held to distribute to several customers) does.  The registration involves a little red tape, but once set up it is fairly straightforward.  There are similar, but not identical rules, in the EU27.

At the moment, consignment stocks and call off stocks moving into the EU (including the UK) from third countries (for example the United States) are treated as imports with VAT and duty incurred at importation.  Stocks then distributed from a stock within the EU (effectively consignment stocks, but dependent upon your contractual arrangements, this can include call off stocks) require a local VAT ID – so once again some red tape which is fairly routine to manage once set up, but you have the extra cost and hassle of importing the goods.

Unless a deal can be done to replicate the current arrangements (and the prospect changes daily) movements between the UK and the EU27 will follow the third country rules.  Imports with VAT and duty, plus a local VAT registration in many if not all cases.

Some businesses are already moving stocks around the EU, both to and from the UK, in order to manage the position post 29 March 2019 – once again planning on a “no deal” or “no single market and Customs Union” solution, or just outright confusion (for example, the Customs authorities may struggle to cope or the IT solutions proposed may have issues).  This is currently being driven by the logistics risks, but some are also changing the way they do business.  Certainly, if you have call off stocks, or are moving goods for processing between the UK and the EU27, you would wish to minimise the logistics delays at import or export.  Therefore, consideration needs to be given now as to whether local VAT registrations are required.

Indeed, some businesses which do not current use consignment or call off stock arrangements may need to start to do so because of Brexit, if only to protect their supply chain.  In my opinion, the cost of an unneeded VAT registration is far outweighed by the cost of getting goods trapped at the port or being unable to set up a VAT registration timeously post Brexit.

There are some technical issues with applying early for a UK VAT ID, for example.  This is because if you are moving call off stocks from the EU27 to the UK, you currently enjoy a simplification and it is possible that HMRC will refuse a registration until matters are clear.  That is going to create problems for all businesses concerned because, if they do, HMRC is highly unlikely to have the resources to meet their current level of efficiency – six weeks.  In brief, you could be waiting months for a VAT ID.  It may be better to consider provoking a registration, perhaps by forming a consignment stock in the UK.  And if the registration isn’t needed – cancel it.

Steve Botham

EU Draft Withdrawal Agreement – the basis of a good plan

In my life, one gift horse I grab with both hands is the basis of a good plan. It may need a little work, but could then involve an extra trip to the pub. This skill is also useful when transferred to my working life.
And the EU Draft Withdrawal Agreement, which I link to, is undoubtedly the basis for a good plan.

I’ve been through the draft UK EU Withdrawal agreement – all 118 pages. I’ve not read every word, but I know enough to say that there’s the makings of a very good deal in there for brave and imaginative politicians. It should make very good reading for business people in both the UK and the EU27. And could resolve visa issues.
And remember, this is a draft, so there is time to work it up to a final working version, as is normal with most EU agreements.

Unfortunately, it was shot down by the UK Government on 28 February 2018 because of talk of a regulatory environment within the Irish draft Protocol which is within the draft agreement. The draft protocol recognises it is made in the light of the 8 December 2017 Belfast Agreement, which the UK agreed with and signed at the time.
The basis of the UK’s rejection appears to be that Northern Ireland will be separated from the rest of the UK. If you read the agreement related to the movement of goods and people, you’ll find that it contains the basis of an agreement which could well suit all parties. It was certainly not worthy of being rejected out of hand. And in my opinion it goes not one step further than was agreed in Belfast on 8 December 2017.

Dealing with people, the Republic of Ireland sits outside the Schengen area, as does the UK. As far as I understand things, they operate the same admission criteria as the UK – i.e. they too already have control of their borders. Indeed, they already rely on us to control people moving into the Republic and we already rely on them to control people moving into Northern Ireland. So, unless the UK says that it does not trust the Republic to continue to manage people at its borders honestly and effectively, the UK can rely on the Irish to manage that side of things (and vice versa).

Then with what the draft withdrawal agreement says, there is no reason to believe that the UK would have more unwanted migrants than it would in any event, whilst keeping a pretty free environment for the movement of labour. Indeed, on 28 February 2018, the UK and the EU moved a further step in that direction, albeit that agreement was overshadowed by the rejection of the draft withdrawal agreement and largely unreported.
But a neat solution for the Irish Land Boundary as regards people, and probably a neat solution for all UK borders with the EU given that the UK already operates border controls for people moving into the UK from the rest of the EU. These controls could probably be tightened up further if the UK adopts the EU free movement opt outs which it has failed to do so far. The opt outs address most of the alleged problems identified in the UK with EU migration in any event, but still allow employers to attract EU workers.

As for goods, the draft Northern Ireland protocol refers to the Belfast Agreement of 8 December 2017, which the UK agreed to and was unambiguous. There is nothing about an EU controlled regulatory environment.

There is reference to a regulatory environment which would be quite normal for any agreement between nations dealing with matters like Customs Duty and taxes. This is an agreed (or more properly, to be agreed) joint regulatory environment between the UK and the EU27.

Earlier in the draft there is detail provided on the essential day to day mechanisms needed to manage cross border movement of goods (including the Irish Land Border). Calling upon existing mechanisms (not new as yet undeveloped as well as untried and untested information technology, cameras, scanners etc). Providing a regulatory solution for Ireland and possibly the whole of the UK. And offering a path to a sensible Customs Agreement (please call is something other than “Customs Union” – even “Wendy” if that’s acceptable) solution to all parties.

If you read the draft carefully it creates room for the UK to do its own trade deals if it wants to (without being explicit, which is definitely the EU way), but provides a solution as regards taxes etc on third country goods brought into the UK for onwards shipment to the EU (and vice versa). This allows both sides to maintain their fiscal integrity of their respective borders and businesses to continue trading as they are now (basically following “origin” rules) with a minimum of intervention (or red tape if you must).

So, I think it is the basis of a good plan. I might discuss it at the pub on Friday evening. And my companions will of course talk about something completely different.