Businesses facing Brexit VAT pressures

Businesses facing Brexit VAT pressures

New VAT rule on imports could affect the UK’s competitiveness due to cash flow disadvantage

Businesses facing Brexit VAT pressures

EU and UK businesses face additional costs and compliance burdens following the Trade and Cooperation Agreement made between the two parties, according to tax specialists.

“Moving straight to import VAT provides a significant cash flow disadvantage,” says James Ross, partner at law firm McDermott Will & Emery. “You’re having to account for VAT earlier than you would have.”

While the UK and the EU have agreed that there will be no tariffs or quotas on the movement of goods as long as they meet the relevant rules of origin, there remain important changes to the tax system in regards to imports and exports.

Leaving the EU VAT regime means UK businesses will treat EU members as countries outside the EU, as of January 1, 2021.

Northern Ireland will apply its own protocol as part of the Withdrawal Agreement between the UK and the EU, UK buyers will be required to pay VAT on goods with a value exceeding £135 at the point of import – a new system that could be detrimental to businesses’ cash flow. For goods valued £135 or less, the VAT will be applied at the point of sale rather than at customs.

If these goods are outside the UK and sold via an online marketplace to consumers based in Great Britain, a UK supply VAT will be charged at the point of sale.

An EORI number has also become mandatory for UK businesses to move goods between Great Britain or the Isle of Man, and other countries or could risk facing extra costs and delays.

“The compliance and bureaucracy that’s associated with a lot of businesses will never have been dealt with before. The larger businesses with bigger exports and those dealing with non-EU countries already may be able to take it more in their stride,” says Ross.

“But smaller guys who have been dealing with EU countries and have been able to treat EU countries as an extension of their domestic market can no longer do so.”

Ross believes the tax changes have created an uneven playing field amongst businesses, which could lead to UK businesses cutting ties with the EU, and vice versa.

“For the big boys, it’s just an additional cost they will have to factor in. It’s for smaller businesses whom the internet has been a boom that the UK is no longer part of a domestic market because they can no longer send goods as easily as they can. From that perspective, selling to UK customers is more trouble than it’s worth,” he says.

Claire Cowen, international tax director at Mazars, says medium-sized businesses suffer the most from the extra fee.

“If you’re a large company, you can probably absorb that cost. The smaller businesses may be less reliant on pure EU businesses – so maybe it’s less important. I worry about the ones in the middle, where they haven’t got the resource of being sort of big enough to absorb it,” she says.

Businesses that do not wish to pay the import VAT at the border will, however, be able to use HMRC’s postponed VAT accounting system, which enables them to declare and recover import VAT on the same VAT return. This will require yet more administrative resources.

Goods exported to the EU will be treated similarly to those arriving from other non-EU countries, meaning a zero-rated VAT will apply.

Brexit could mostly affect the business-consumer market, in which companies selling products online could stop shipping to customers in the UK, according to Brad Ashton, indirect tax partner specialising in custom duty, VAT, and international trade at RSM.

The new VAT and customs requirements could also force businesses to relocate.

“There will be instances where businesses will change their manufacturing processes or their distribution supply chains to make them more efficient, which could lead to the relocation of manufacturing. But we could see relocation of stockholding and distribution hubs before a wholesale change in manufacturing locations.”

Some of Cowen’s clients are considering moving to new territories.

“If they do that, then what we lose is the people who work in that warehouse and the people who support the admin function in that warehouse,” she says.

The EU Merger Tax Directive (EMTD), which aims to remove fiscal obstacles to cross-border reorganisations of companies in the EU, will also no longer apply to UK companies under the new Brexit rules.

What’s more, greater friction, costs, and bureaucracy introduced by Brexit could cause the UK to look less advantageous and competitive, according to Ross.

“They almost instantly lost a degree of competitiveness against EU suppliers,” adds Ashton.

“We’ve seen many clients facing the prospect of customers saying they are more than happy to carry on purchasing products from them, but EU customers don’t want to get involved in the customer’s process.”

For now, UK companies will have to focus on remodelling their structure to mitigate the risks caused by Brexit.

“On the VAT in terms of your supply chain, it may be that you need to get additional VAT registrations in different countries to enable supplies to continue along the same lines as they do at the moment,” says Ross.

“Corporate structure may need reviewing as well. Potentially, a UK holding company will no longer be able to get full exemption from withholding taxes paid on dividends out of German or Italian subsidiaries in the way that they would have been able to do so before.”

Ashton says companies will need to consider the cumulative effect of Brexit on supply chains as being significant while distributors of goods who may have goods coming into the UK for distribution within the UK and the EU will likely face double duty charges.

“It’s about making the most efficient use of supply chain flexibility to ensure goods are delivered into the EU or the UK market, but only having one attracting one customs process and one set of customs charges,” he explains.

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