Brexit and the latest VAT issues
Following the UK public’s historic referendum decision to leave the EU, the countdown is now on to exit day, currently 29 March 2019 at 23.00 GMT.
As the world’s media repeatedly inform us, negotiations into the ‘deal’ are ongoing, and are having varying degrees of success, dependent on whose point of view you hear. However, more recently a breakthrough was announced which provided an estimation of the ‘divorce bill’, together with confirmation on EU citizen’s rights, and the status of the Ireland/Northern Ireland border. The next stage of the negotiations may now commence.
Of course from a VAT perspective, the impact of Brexit will be significant. Supplies made to and from the UK will, in future, be exports and imports rather than intra-community dispatches and acquisitions. Under the current rules the UK is part of the single market and so goods can move freely between the UK and other EU member states, with VAT generally accounted for under a ‘reverse charge’ type mechanism. Looking forward, such movements will be potentially subject to import VAT, customs duties, and additional levels of administration and bureaucracy. Of course, whether these will be specifically agreed terms, or WTO rules remains to be seen.
However, from the breakthrough, the situation surrounding the Irish border provides a particularly interesting situation from a VAT perspective. It has been confirmed that there will definitely be no so-called ‘hard border’ separating the Republic of Ireland and Northern Ireland, and so effectively free movement between the 2 countries will remain. It has been indicated that unlike the remainder of the UK (England, Scotland, Wales), Northern Ireland will remain as part of the single market and customs union, meaning they remain aligned with the EU from a regulatory perspective.
What is a single market?
A single market allows the free movement of goods, services, money and people within the European Union, as if it was a single country. It is possible to set up a business or take a job anywhere within it. The idea was to boost trade, create jobs and lower prices. But it requires common law-making to ensure products are made to the same technical standards and imposes other rules to ensure a "level playing field".
What is a customs Union?
A customs union ensures EU member states all charge the same import duties to countries outside the EU. It allows member states to trade freely with each other, without burdensome customs checks at borders, but it limits their freedom to strike their own trade deals.
From a VAT perspective, part of the UK remaining in the single market and customs union could create huge complexity. By being within the single market, it appears that Northern Ireland could potentially still operate under the current system of dispatches and acquisitions, rather than imports and exports. From a VAT reporting perspective, it is hard to comprehend how this would work practically. A UK VAT registration covers all 4 countries of the UK, and so how would the different types of transactions be reported-perhaps a Northern Ireland specific VAT return? What documents would need to be retained to prove acquisitions were made and not imports? Perhaps slightly concerning would be the possibility of goods being routed through Northern Ireland to mainland UK in order to avoid import VAT and duties. There are many questions which would require answers prior to a finalised deal.
In addition to the single market, there are also considerations if Northern Ireland were to remain in the customs union. This would see mainland UK operating under different trade deals, and with potentially widely varying charges on goods. As with the above, this would represent huge compliance headaches.
The impact of the Brexit vote was always set to have a major impact on VAT and the treatment of certain transactions, however the prospect of different rules within different countries of the UK has the potential to bring another level of complexity.
Until agreements have been reached of course, there is no certainty as to what considerations will be required, but clear guidance must be provided to businesses at the earliest opportunity to allow for adequate preparation to remain complaint, and VAT efficient.