Brexit and indirect taxes: Prepare far ahead of transitional period

By Alan McLintock

In the 15 months since the referendum on the UK’s membership of the EU, it seems that not a day goes by without articles, webexes or seminars discussing the implications of our forthcoming departure, or the sight or sound of politicians and civil servants of some shape or variety drawing often contradictory red lines.

Brexit is seen as both the best thing that can possibly happen, harkening in a new dawn of political sovereignty and economic growth, as well as viewed as the death knell of UK prosperity and growth leading to economic collapse and the destruction of both our services and industrial bases.

During my speech at the recent Chartered Institute of Taxation Indirect Taxes Conference, I looked at some of the possibilities that gradually seem to be taking shape about Brexit and considered some of the things that those of us working in or advising businesses in the UK should consider.

The first point I made was about what happens the day after Brexit and when this will become sufficiently clear enough for businesses to plan for. I threw out the following points as being relatively clear:

  • No final agreement can possibly happen on the final post Brexit agreement by March 2019. If there is no transitional agreement then we fall into the ‘no deal is better than a bad deal’ camp even if politicians have been rowing back from that expression.
  • Businesses in the UK will almost certainly need to prepare and action their Brexit plan before knowing what is actually agreed in any transitional agreement. Changes to supply chains, distribution centres and associated mid office and back office systems can often take about 12 month  to design and implement.
  • We need to separate the payment of duty from the associated importation documentation. While many forms of transitional agreement that have been mentioned have zero duty being applicable, the only outcome providing frictionless trade is membership of the EU. A transitional agreement might treat the UK as if it was still in the EU and so achieve frictionless trade during the transitional period (but not thereafter).
  • The negotiations around the transitional period might only become clear very close to March 2019. Consequently, any 24 month transitional agreement may just see a repeat of the uncertainty of today with business trying to second guess outcomes and certainty on the negotiations arriving late in the day (many businesses would like a 36 month transitional agreement at a minimum for purely pragmatic reasons).
  • Any pain as a result of  Brexit might start weeks and months before March 2019 as businesses try and move goods into or out of the UK to beat the Brexit deadline with UK/EU Customs being under pressure long before any transitional agreement takes effect.

My second point at the conference was what you should be doing to help your business or those of your clients survive and perhaps even thrive during the uncertainty of the next few years? I suggested they consider some of the following:

  • Whatever size of business you are, you do need to sit down and talk about how the different Brexit scenarios impact upon your business and how any advantage can be leveraged or damage mitigated. A recent survey by the ICAEW has found less than a third of British businesses have made plans for the UK’s departure from the EU.
  • If you are involved in the manufacture, distribution or sale of goods then you need to map out your supply chain and speak with a Customs specialist. For example, the EU Customs agreements with South Africa, Turkey and many other countries will no longer apply to UK business and some manufacturers will already be looking at their Tier 1 and Tier 2 suppliers to consider if EU origin or UK origin for preference purposes might be in jeopardy. The outcome being do they need to move production into or out of, the EU or UK. The House of Commons Treasury Committee also heard on 14 September that 130,000 businesses in the UK trade with Europe but have never had to file Customs entries or understand Customs processes – if you are one of them start to get yourself ready.
  • You should probably anticipate some degree of disruption to your supply chain. HMRC have suggested that there could be up to 255 million Customs clearances per year post Brexit, up from the current 55 million per year. Consider the impact across the ports in Europe and you realise you just need one system to fail or one country to fail to be Brexit ready to put stress on the other ports.
  • Importers will need to pay import VAT rather than account for acquisition tax. There is going to be a definite cash flow impact. Have you sat down and modelled when the money goes out (even under duty deferment) and then comes back into your bank account, how much cash you might need? Many businesses have been lobbying for the UK to introduce for Brexit the payment of import VAT through your VAT return (as several European countries already do).
  • Another matter to consider is the recovery of non UK VAT through the cross border EC Refund Scheme. Once you leave the EU you will need to submit such claims via the 13th directive and you might find that a number of countries will reject claims unless or until the UK signs a reciprocity agreement or is added to a white list of approved countries. Get your 2018 claim in before March 2019 so at least you fall under the current rules for one last year.
  • Analyse your own and, as far as you are able, your suppliers or customers supply chains. Any supply chain that relies on the VAT triangulation rules will fail requiring new VAT registrations in the UK or an EU Member State. You may wish to consider what countries apply a domestic reverse charge to supplies of goods to see if you can avoid incurring any actual cash VAT liability. UK-EU cross border call off stock, temporary movements of goods for processing or repair and similar reliefs may also fall away leading to tax liabilities or registration requirements.
  • Departing the EU might lead to more VAT registrations in Europe for UK businesses as the Mini One Stop Shop and Distance Selling threshold stop being applicable.
  • Consider lobbying and communicating the difficulties Brexit may bring to the different tax and government bodies or through your trade associations and membership bodies (not forgetting of course the Chartered Institute of Taxation).

Good luck with your Brexit planning!

Blog by Alan McLintock CTA ATT, Chair of the CIOT's Indirect Tax Sub-committee