What Does Brexit Mean For VAT?

  • 25 October 2017 KnowGlobal

The UK joined the European Union (European Community) in 1973 and as a result during April of that year, VAT was first implemented across the Country.

Since then, the standard VAT rate has increased to 20% during 2011 following a rough few economic years, but now with large uncertainties surrounding Brexit what does it mean for VAT (and business in general)? The general consensus is that Brexit is not going to be an easy ride for tax changes, with a high number of individuals expecting a hard Brexit with no VAT-free trading areas for British businesses inside the EU, and others expecting a ‘No Deal’ Brexit.

No Deal Brexit

A ‘No Deal’ Brexit has been talked about a lot in recent months, in the press and by politicians, with the start of trade negotiations not going quite as swimmingly as the UK had hoped. Essentially what it means is that following the continued negotiations, the European Union and the UK are still unable to come to a formal agreement about the future between the two parties. Although a ‘No Deal’ could be called, the parties would still require basic formal agreements to be created, for necessary points such as trade and international security.

Earlier this year, Britain threatened both a Customs Bill and Trade Bill which would impose customs duty and import tax on items imported from the EU at the same level as non-EU members, a desperate attempt to try to encourage negotiations further perhaps, although this threat may in fact become the future of EU / UKs trading (Hope, 2017). In doing so, many household purchases would quickly become more expensive in the UK, with final consumer goods repeatedly hit by new duties and taxes from their components European supply chains.

There have been speculations that the most likely outcome is to use the WTO (World Trade Organisation) levels for goods sold overseas, this would increase the price of goods sold into Europe, thanks to higher trade tariffs, additional customs charges, and an increased amount of administration required.

Using the WTO levels would also see businesses being charged import VAT which is calculated on duty inclusive value of goods, this could result in many organisations suffering from cash flow issues. Although the VAT can be reclaimed it will be charged at a higher amount, more frequently, and only reclaimed once a quarter (Bartam, P, 2017).

Some businesses have started a proactive approach to this issue by applying for tax relief early to off-set the potential increases. There are many tax credits available in the UK, and one worth noting which is often missed is the R&D tax credit, regularly thought of as only available to scientific or innovative technology businesses, the credit is readily available to a much wider range of businesses, their activities and investments.

An administrative nightmare

With article 50 triggered and Britain’s exit due in 2019, it’s been noted that the likelihood of the UK maintaining many of its current regulations and laws is high, however with trade directly impacted by the ongoing negotiations it’s also clear that Sales Taxes are likely to see changes.

Whilst the whole of the UK and Europe’s tax rulings will not change completely overnight in 2019, it’s clear that any changes are likely to impose increased administration on a business and government level.

Transforming free-trade supply chains to now account for duty and customs will be difficult enough for all involved, not to mention that final consumer products are likely to be created from a web of smaller international supply chains, therefore becoming subject to rising costs, administrative requirements and logistics timescales.

Whatever the outcome of the current negotiations, it’s clear that both UK and European businesses will be subject to key changes surrounding tax and VAT, however until the new regulations and bills are created it’s very much the fear of the unknown for now and business as usual. Should you need further advice in the meantime, would like assistance with your current obligations or to discuss your tax credit relief opportunities contact the KnowGlobal team for a free consultation with our international tax partner.

Are you thinking about international expansion but don’t know where to start? We’d love to hear from you.

Speak to one of our team