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8 January 2018

VAT will be the next Brexit headache for thousands of British businesses

We’ve taken it for granted that goods and services don’t attract import VAT at the border. 

By Chris Leslie

We are told that 2018 will open a new chapter in the Brexit negotiations, with “Phase 2” allowing discussions about the framework for a future trading relationship (though not, it should be noted, actual trade deal talks). Yet with every page turned in this saga comes a series of potentially costly and complex problems, largely unforeseen at the time of the referendum.

The “EU VAT Area” is a case in point, and it could have consequences for businesses and their customers. We’ve taken it for granted that goods and services traded with our neighbours don’t have customs duties, but also don’t attract import VAT at the border. It’s been so simple that we even stopped talking about “imports and exports” with the EU and called the products going back and forth “arrivals and dispatches” instead. When you’re trading within the EU, goods and services are treated as effectively VAT-free. This is because there’s a common agreement which means VAT paid from one business to another can be recovered and offset.

But this could all end if we dismantle the EU VAT Area architecture in 2021 (or in 2019 if we mess up the transitional agreement). This could mean firms having to pay VAT upfront at borders, which would upend decades of normal business practices – and add millions of pounds in bureaucratic costs. The result? Not only will businesses’ profit margins be hit, but they may pass on the impact to customers via higher prices.

Some companies are already grappling with import VAT payments – the 141,000 British companies currently trading with non-EU countries. This figure could virtually double after Brexit, when the 132,000 businesses at present trading only with EU member states are added to this number.

Are businesses and the banks prepared for this change? Why hasn’t the government’s impact assessment calculated the extra time and effort these firms will need? Will leaving the VAT Area also hit consumers and any parcels that they order from other European countries? How will the post office cope with these new customs and VAT arrangements?

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Parliament’s first day back in 2018 sees the second reading debate for the Customs Bill (now known as the Taxation (Cross-Border Trade) Bill), legislation which potentially ends the current light-touch arrangements. Yet ministers haven’t adequately consulted with business on this, nor have they set out their negotiating objectives with the EU. We assume that the Prime Minister could do without Dover and the Channel Tunnel becoming gridlocked by red tape, let alone the headache this would create at the border between Northern Ireland and the Republic. So will the government dream up a totally new system?

Or better still, wouldn’t it be simpler to stay in the existing arrangements? Of course, this would mean accepting that our VAT rules stay aligned with those of the rest of the EU and clearly it would have to involve a continuing pan-European judicial dispute resolution mechanism, currently the European Court of Justice. Getting the benefits from this club means working in partnership on its rules. So for the sake of simplicity, reducing bureaucracy and keeping costs down, Britain ought to stay in the EU VAT Area, and the Bill going through Parliament should be amended to signal this intention.

According to HM Revenue and Customs, we are on the brink of seeing the existing 25m customs declarations rise to 255m over the same period, post Brexit. HMRC are also planning a systems overhaul in 2019 for customs declarations. As with any major shake-up, it is a gamble.

Imagine the VAT headache to accompany this – and the costs to business involved. It seems obvious that remaining in the VAT Area is vital for UK businesses trading with the 27 other EU countries.

Unless ministers try to do so, this is one chapter of the Brexit saga that risks becoming a major horror story.

Chris Leslie is a member of the International Trade Select Committee and was Shadow Chancellor in 2015