UK to exit EU VAT regime in January 2021

UK to exit EU VAT regime in January 2021

Traders face major costs and admin requirements as a result

 The UK is scheduled to leave the European Union by force of law on 31 March 2019. This is based on the two-year notice period started by the triggering of Article 50 of the Lisbon Treaty. However, all sides agree that, given this is only 12 months away and with no sight of a new trading agreement, this needs to be extended.

To allow businesses on both sides of the English Channel to prepare and adjust for the UK leaving the EU, a potential 21-month transition period following 31 March 2019 now looks likely to be agreed.

This would mean the UK being outside the single market and customs union from 2021. A simultaneous exit from the EU VAT regime threatens many thousands of UK and EU trading businesses.

Based on Avalara’s recent survey of e-commerce businesses selling into the EU, over 27,000 small e-commerce retailers will have to spend over £720m per annum in new VAT compliance charges just to keep selling into the EU.

UK to compromise on 31 Dec 2021 full Brexit

The UK had requested a 24-month transition period from the 31 March 2019 scheduled date for Brexit. This equates to a 31 March 2022 formal break with the various EU Directives and laws. However, the EU quickly rejected this last month, and instead has offered a transition period of only 21 months. This is based on the end of the EU’s current five-year budget cycle, 31 December 2021.

It is highly likely that the UK will accept this compromise in the next few weeks but may look to secure concessions such as the early right to commence Free Trade Agreements (FTA) negotiations with other countries. However, risks to the negotiating process do not make this certain. T

Other Brexit date possibilities

We could still be facing at a ‘hard Brexit’ on 31 March 2019. This would be the case if no withdrawal deal is struck, including a resolution on the complex Northern Ireland border issue.

Another option is a business-friendly 31 December 2023 exit. Since there is no sight of even a draft post-Brexit UK-EU trade agreement, there is nothing for companies to transition to. This could mean they demand a further two-year real transition period, leading to a December 2023 final withdrawal date. The politics of this would be a considerable challenge.

The other decision is never. A collapse of the Brexit political process could trigger a new general election which could result in a pro-Remain government coming to power. Probably unlikely; but a Labour and rebel Conservative MP grouping could orchestrate an effective no-confidence vote to achieve this at the EU Withdrawal Bill vote this autumn.

What does leaving the EU VAT regime mean for international traders?

Once the UK leaves the EU, it becomes a ‘third country’ for VAT trading purposes. This will have a huge impact on importers and exporters and will have a number of significant implications

The first will be an obligation for small e-commerce companies to VAT register immediately in any EU country where they are selling. This is due to the loss of the EU distance selling threshold simplification.

Secondly, we will see a 20% UK import VAT bill on all goods coming in from the EU. This is recoverable but will add burdensome new paperwork and processes.

Finally, it will mean an average of 4% non-recoverable tariff costs on all imports. UK exporters to the EU, of which there are approximately 132,000, would face the same profit-margin hit.

The implications and timing of the UK’s eventual exit from the EU VAT system are immense and still largely unknown. The commerce industry, through the CBI and Chambers of Commerce, is becoming increasingly vocal about the need to end the uncertainty if Brexit is not to turn into the next financial crisis of 2008.

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