Nobody yet knows what the outcome of the Brexit negotiations will be, but if the UK leaves the EU, EEA and Customs Union, Menzies Robert Facer, VAT director at Menzies LLP, believes the future comments on future of VAT after Brexit could spell choppy waters for the UK.
What do you see as the main implications for VAT-registered companies trading with Europe in (a) goods and (b) services?
In the event of a hard Brexit, VAT-registered providers of goods are likely to experience significant additional costs as the UK leaves the single market. In addition to the loss of VAT-free trading with the EU, customs duties would also increase the costs of moving goods in and out of the EU. The separation will effectively create a new customs frontier, which could cause considerable delays in the movement of goods and administrative burdens, resulting in damage to the UK’s reputation as a place to do business.
For companies trading with the EU in services specifically, there is a strong possibility that VAT rules would stay largely unchanged, however, this is not yet known.
After a “hard Brexit”, what changes do you think might be made to VAT in the UK, bearing in mind also the current OTS review of VAT?
The self-assessment process for VAT makes it a particularly efficient revenue raiser for the Government and as such, we are unlikely to see its complete removal after Brexit. Instead, a more likely scenario is that once VAT law comes under UK jurisdiction, it will be tweaked gradually over time. This could have a positive effect for VAT-registered businesses in terms of simplifying VAT measures that have become overly complex and onerous. For example, there is currently a huge amount of case law around the VAT treatment of financial services, which can cause real problems for businesses.
Is there anything organisations can or should be doing now to prepare for possible VAT changes post-Brexit?
To continue taking advantage of the benefits of single market rules and avoid EU tariffs, businesses trading in goods with EU countries may wish to consider establishing a European hub or distribution point. Businesses should also think carefully about the potential impact of a hard Brexit on their organisation, taking into account the extent of its importing and exporting activities. Given the current uncertainty surrounding the outcome of Brexit negotiations, it is difficult for businesses to plan ahead much more than this, from a VAT perspective.
What are the biggest issues on their minds and how are they dealing with them?
An issue causing widespread concern for businesses at the moment is the cost of making contingency arrangements for a hard Brexit when there is still so much uncertainty surrounding the outcome of the ongoing negotiations. Relocating outside of the EU may offer the best chance of mitigating costs for some businesses, as it could eliminate the need for cross-border trading. However, this will not be appropriate for all businesses. With it now looking increasingly unlikely that a trade deal will be made before Brexit takes place, and cost implications for businesses certain to depend on whatever is agreed, it seems premature to make big, structural changes at this time.
So what now?
Businesses involved in EU trade of goods should continue keep a close eye on how the negotiations progress, the impact it will have on the ability to compete with EU businesses and the opportunities that it may create with non-EU countries. Menzies will continue to monitor the situation as the negotiations progress and keep you updated on the impact on VAT.
Find more information on UK VAT changes after Brexit.