Articles | Brexit: Keep Calm and Don’t Panic

Philippa Roles, head of Tax at FSP, speculates on the likely consequences of Brexit in the field of indirect taxation - primarily VAT and customs duties - in the UK.

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Philippa Roles

Philippa Roles

So a borderline majority of the UK electorate voted against remaining in the European Union (EU). Whether you agree with that outcome or not, the reality is we are “Brexiting”, so steps will need to be taken to extricate many of our legal processes and rules from overriding EU determination. This will inevitably impact on some of our tax laws; in particular the indirect taxes such as value added tax (VAT) and customs duties (Duties).

Whilst there is nothing to stop the UK from simply replicating the EU legislation and processes that have determined so much of the procedure and practice in the VAT and Duties sectors over the last three decades, there are parts of that practice that would cease to make sense if the UK was no longer part of the EU. Change is required; whether it is wholesale or just bare bones, there will still be some upheaval.

Whatever the degree of change, it will herald in a period of uncertainty about how the UK should unwind what is a spider’s web of reliance on the EU in the fields of VAT and Duties. It is implausible to think that at this early stage we can plan for every aspect; but as a starting point, a good way to go is to identify the aspects of your business that will be vulnerable to change as a consequence of Brexit.

VAT

There are extensive areas of VAT legislation that the UK has implemented from EU directives that rely on an EU versus non-EU country designation to determine the VAT treatment of a transaction. In future the EU designation will carry no meaning for the UK since it will no longer be a part of the EU trading block. The VAT rules will simply recognise UK to UK supplies, and UK to non-UK supplies.

We expect the impact of the changes required to be felt most strongly in the areas of compliance, business administration and bottom line costs. As an example, businesses with EU dealings will inevitably need to revise their VAT accounting processes. If those processes are automated, updated software will need to be purchased.

On the compliance side, Intrastat and EC Sales Lists would no longer need to be completed; which would no doubt be a very welcome change for most businesses. However, where a business trades in goods, this would be replaced by the need to complete additional import and export declarations. This compliance function is often outsourced to a freight agent or customs broker, so whilst internal resource would be freed up by removing the need to report intra-EU transactions for VAT and Intrastat purposes, an additional external cost would arise from the cost of completing the additional import and export declarations.

In terms of bottom line costs, the biggest impact is likely to be felt as a result of losing the duty rates that are afforded to EU members. This is considered further below.

There will also be changes for those EU (non-UK) businesses that trade with the UK.
Take, for example, the financial services and insurance sectors where transactions with non-EU counterparts allow VAT recovery on costs. After Brexit, EU based businesses making supplies to customers in the UK could see their VAT recovery rate boosted for sales of financial and insurance services to those UK customers.

Duties

Being a member of the EU means being a part of a customs union where goods and services can move within its confines free from Duties and Import VAT; and without the constraints of tariffs or quotas.

As a consequence of Brexit, there are three options open to the UK:

(i) join the European Free Trade Association and the European Economic Area, which would allow the UK to retain access to the common market on the same basis as Norway, Iceland and Liechtenstein;
(ii) negotiate either a standalone free trade agreement with the EU or a series of agreements covering individual trade sectors as Switzerland has done; or
(iii) negotiate an ongoing customs union with the EU in the same way as Turkey has done.

It is entirely possible that in negotiating a new trade arrangement with Brussels, Brussels could seek to impose tariffs and/or quotas where ones did not exist previously. For example, there would be nothing to stop Brussels imposing a 5% tariff on all UK car exports, thereby increasing the costs for overseas customers buying UK made cars. This could have a notable impact on the UK economy because presently eight out of the ten cars made in the UK are sold abroad. The volume of cars being made would decrease quite rapidly if overseas buyers were discouraged from purchasing UK made cars due to the increased price tag brought about by a tariff levy.

Until new trade agreements are in place, the UK would lose the benefit of the duty rates afforded by being part of the EU. This would increase the landed cost of many goods with no comfort that such increase would only be short lived, because trade agreements can take many years to negotiate.

So what should businesses being doing now to prepare for the inevitable change? Just watch and wait? In terms of implementing changes now, the best advice for most businesses has to be to watch and wait. However, that is only in relation to actively implementing change; there are things that a business can do to be prepared such as carrying out an internal audit and identifying those aspects of its business and procedure likely to be impacted by changing legislation and processes. If any element of your VAT accounting system is electronic, contact your supplier to find out if they will be releasing an update when the time comes or whether a whole new system will need to be introduced. If at all possible, try to get a range of fee estimates for this so that it can be built into a future budget.

But most important of all: keep calm and don’t panic.