Managing Your Cash Flow

The government must act to save businesses from Brexit VAT beating

5 min read

29 January 2018

According to Ann Jones, MD of Europe at VAT IT, the current VAT rise – a consequence of leaving the Customs Union – will push the cash flow of UK businesses to breaking point. However, these issues are being hidden behind the main Brexit headlines.

HMRC has announced that the amount it is owed in overdue VAT and tax is now over £4.4bn. This was a revealing insight into the problems facing British businesses and a tell-tale sign of national cash flow problems, which are likely a result of late payments from customers.

Therefore, the changes in the cross-border trade bill should be a concern to any of the supposed 130,000 UK firms that will now be faced with paying import VAT on any goods that enter the UK from an EU state.

The current rules that are in place are the result of the UK being in the EU VAT area. This means when goods enter the UK, they aren’t subject to VAT as they are instead treated as intra-community dispatches and acquisitions, with VAT generally accounted for under a “reverse charge” mechanism.

However, once the UK leaves the single market and the Customs Union, these goods will be treated as imports and exports instead, meaning they will be subject to import VAT, customs duties and the inevitable time-consuming bureaucracy and administrative costs that this would entail.

This result would be catastrophic for UK business bosses, especially at a time when additional costs would push companies to breaking point as they navigate the Brexit minefield.

Curiously, it may also be the case that Northern Ireland are exempt from any VAT increases as their position in the Customs Union looks assured, meaning they remain aligned with the EU from a regulatory perspective. How this effects trade between Northern Ireland and Britain is another issue that will need resolving.

Commons Treasury select committee chair Nicky Morgan pointed out that this VAT increase would be a nightmare for businesses, resulting in hefty cash flow implications as payments are moved forward long before tax can be recovered from HMRC.

The positive news is it’s in both sides’ interest to resolve this problem, but the solutions aren’t entirely obvious.

An existing VAT deferment scheme in the Netherlands may provide a useful framework for what will likely be introduced to alleviate this burden. This Article 23 licence concept, which defers import VAT until the end of the accounting period rather than at the point of entry, would ease this cash flow problem significantly if it can be implicated and agreed on.

At the moment it doesn’t seem likely. If both sides continue to play hardball then the EU may choose to impose VAT on UK goods entering the EU in return. Once the additional 20 per cent charge is imposed in both directions, the cost of doing business will escalate and both sides will find cheaper options elsewhere.

This would be detrimental to companies on both sides of the channel and isn’t an attractive option for either negotiating team. The UK remains the EU’s biggest net importer and many EU exporters rely on it for valuable business.

If a solution can’t be found, the opportunity for 13th directive claims dramatically increases, which are used by non-EU nations currently. It is a complex and time-consuming process though, still conducted in the archaic paper-format, which only allows for a small amount of relevant expenses to be reclaimed. Something more will be needed.

The changes in the cross-border bill may be part of negotiating strategy, but the government is playing with the survival of its own companies, it will need to act again before the Brexit bill is finalised to save them from this VAT beating.

In the meantime, companies should familiarise themselves with the options available to them should they have to face any of these potential eventualities. Practical and technical advice from third parties specialised in these matters will be necessary to ensure businesses are compliant with VAT laws, and, so they can take advantage of any simplifications that are hopefully introduced.

Ann Jones is  MD of Europe at VAT IT,  a global leader in cross-border VAT and tax recovery that maximises tax recovery end to end through its industry-leading technology, ensuring full compliance for companies including Ericson and Volvo.