To every retailer’s frustration, there are many uncertainties around the Brexit deal we’ll get. But one that until very recently has been largely overlooked are the consequences of leaving the common VAT area.
It’s a prime example of a seemingly technical point which could have big implications and was being completely drowned out amidst all the political noise.
Without a specific deal on VAT with Brussels, importers (ie, many retailers!) would be liable to pay VAT earlier on goods they bring into the country, rather than at the ultimate point of sale.
This would create major short-term cashflow issues for retailers, not to mention administrative burdens for UK Customs.
As all retailers know only too well, anything that impacts them in the end can have a knock-on effect for consumers too. In this case, prices could rise with the increased cost of moving goods in and out of the UK.
Even HMRC wouldn’t escape scot-free. New import processes would not only mean extra government expenditure for reimbursing firms for upfront tax payments, but new systems and staff will likely be required to manage and supervise the new activity at borders and ports.
The recent reassurance from within the EU that the transitional period from March 2019 will allow current trading conditions to continue was certainly welcome and the right decision for consumers.
But essentially, unless the UK reaches agreement with the EU on VAT, this just buys businesses some time until they face a cashflow bombshell on the expiry of the transitional deal.
“It’s completely simplistic for government to assume that retailers could just dig into their ‘deep coffers’ and find such cashflow easily”
At this point, every finance director of a retail business will be doing some back-of-the-envelope calculations about what the quantum of that could be. It’s a big number.
To me, it’s completely simplistic for government to assume that retailers could just dig into their ‘deep coffers’ and find such cashflow easily.
This is why we have led the campaign on behalf of the business community, being the first to publicly raise the issue of upfront import VAT and seek remedies to the implications of leaving the EU VAT area.
So now that we’ve put the issue firmly on the government’s agenda, we need clarity first and foremost. The government still hasn’t reached a position on whether it should seek to remain within a common VAT area with the EU.
But we are hopeful for an answer from HMRC on how it can mitigate the cashflow and red-tape burden, given the Treasury Select Committee Chair Nicky Morgan’s recent intervention, prompted by our face-to-face briefing with her.
Also welcome is the publication by the Treasury Select Committee of our recommendations.
Recommendations and action
So there’s some positive signs of support in principle from across the political spectrum on the need to mitigate the effects of any potential changes in import VAT.
Indeed, we recognise that changes to the rules are being consulted upon now by the Commission.
The test, however, will be how these good intentions translate into actions that help the 273,000 UK businesses facing liability for upfront import VAT, including 132,000 for the first time on EU imports.
As we have recommended, the simplest option would be for the Treasury to introduce a deferment scheme for UK businesses liable for import tax. This would ensure no-one loses out in cashflow terms as a result of changes to VAT co-operation with the EU.
For businesses, it would offer certainty; allowing stronger growth and trade – and crucially for consumers it would stem the flow of added cost pressures to shop prices.
Yes, all rather complicated, but a no-brainer, surely? Particularly as such a decision is completely independent and separate from the current raging debate about whether the UK should be outside or in “the” or “a” customs union.
However, in such a politically charged environment, even no-brainers require a concerted effort.
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