City at night
Brexit - Where we are now
We identify the key things that businesses can do now to prepare for a Brexit deal, or no-deal, outcome.
Rober Marchant, VAT Partner
17/09/2018
City at night

Where we are now

It has been a hectic summer with a flurry of government activity and almost daily headlines and speculation about the government’s preferred vision for Brexit and strategy for the negotiations.

In the proposals released following the cabinet’s meeting at Chequers in July, a statement was issued saying: “The United Kingdom will leave the European Union on 29 March 2019 and begin to chart a new course in the world.”

Amongst a number of things, the proposals would result in the UK adopting a “common rulebook” with the EU for trading in goods, in an attempt to maintain friction-less trade at the border. In response, the European Commission predicted “significant disruption” irrespective of the outcome of the negotiations.

There has been agreement reached that in the event of a deal there will be a transitional period until 31 December 2020, giving businesses much more time to prepare for the new arrangements. However, if there is no deal the expectation is that the UK will leave the EU on 29 March 2019, without any transitional provisions.

In case of a no deal Brexit, the UK government has released the first of fifty or more documents covering all aspects of trade with the EU should the UK leave with no deal, some of which cover many areas of tax. The guidance is particularly useful as it may also reflect the expected position in a deal scenario but one where the UK sits outside the EU’s VAT and Customs regimes, as is expected given the current stance of the government on this issue.

Even with the addition of the newly released documents there are still many issues which cannot fully be covered, and remain as some of the Brexit fiscal unknowns.

Brexit fiscal unknowns

  • International trade arrangements, including Customs Union and VAT matters.
  • Border issues with Northern Ireland.
  • Regulatory alignment between the UK and EU.
  • International mobility and the impact on the availability of labour.

International trade arrangements rightly continue to feature prominently in the Brexit discussions, including in the Chequers White Paper.

International trade: Goods

The government has said that: “...(we will be) leaving the Single Market and the Customs Union, ending free movement and the jurisdiction of the European Court of Justice in this country, leaving the Common Agricultural Policy and the Common Fisheries Policy, and ending the days of sending vast sums of money to the EU every year.“

The government has previously spoken of its aims of making trade with the EU as “frictionless” as possible. From a VAT and Customs Duty perspective, if the UK leaves the Single Market and Customs Union, movements of goods between the two would currently fall to be taxed as imports and exports and would result in significant changes to the amount of indirect tax paid and the processes involved. One of the recently released documents on the no-deal scenario revealed certain simplifications that would assist business. It would also be hoped they would apply in a deal scenario, but one where frictionless trade was not achieved:

  • Ordinarily import VAT would be payable on goods arriving into the UK. Businesses who currently import goods from outside of the EU will be familiar with the process; while for many the import VAT paid may be recoverable, it was feared that there would be a change in the cash-flow position as import VAT is paid up front and then reclaimed at a later date. This is different to how VAT is currently dealt with on purchases of goods between the UK and the other member states. However, the Government expects that in these scenarios VAT would be recoverable on the current VAT return through a postponed VAT accounting procedure, which may actually improve the cash-flow position of UK importers as this would apply to all imports not simply those from the EU. It is perhaps an indicator that this may be applicable if there is a VAT and customs border with the EU as expected even in a deal scenario.

  • Customs Duty may be payable when goods are imported into the UK and this is a cost (unlike import VAT) that is not refunded. The amount of Customs Duty payable, if any, will depend on the outcome of the discussions about the UK’s involvement with the EU Customs Union. It should be noted that the postponed accounting for VAT does not apply to customs duties and businesses unfamiliar with the application, calculation and procedures for paying import duty will need to consider their processes.

  • Notwithstanding the contingency plans for a no-deal Brexit, the UK has proposed a free trade area for goods between the UK and EU and the use of a Facilitated Customs Arrangements in respect of goods coming to the UK/EU from outside of the EU.

  • It remains to be seen whether these proposals will be agreed by the EU. If they are not, the Institute for Government in its September 2017 study has identified that there could be 180,000 Small and Medium Enterprises that will need to make customs declarations for the first time. The introduction of customs declarations alone could end up costing traders in the region of £4 billion a year.

  • At a practical level, there has been significant concern raised by businesses that there could be delays resulting from customs and border checks when goods enter the UK. Indeed the head of the HMRC has previously said that Britain could need up to 5,000 extra staff to handle customs and border checks after Brexit. Similar concerns have also been expressed about UK exporters’ goods also being delayed on arrival in EU Member States.

  • Other points that have arisen from the no-deal guidance is that HMRC have confirmed that sales to EU countries will qualify for zero rating but also mention that it is more likely that UK exporters will have obligations to register for VAT in EU countries going forward. On the plus side, EC Sales Lists will not be required, but there is no mention of the removal of the Intrastat reporting requirements. Once again this is likely to be the case even if the UK leaves with a deal, so is potentially useful guidance for business in both scenarios.

Become a 'trusted trader'

If a UK/EU free trade area, or something similar, is not agreed, one possible solution to the extra checks and likely delays that could arise at the border is Authorised Economic Operator (AEO) status, in effect a ‘trusted trader’ scheme. This is an EU wide concept that has existed for many years and is internationally recognised. AEO status indicates that qualifying businesses’ roles in international supply chains are secure, and that they have efficient and compliant customs controls and procedures. AEO registration is voluntary but already brings certain procedural and financial benefits for businesses engaged in international trade.

One of the government’s proposals at the moment is that AEO status, or a UK equivalent, would reduce the documentary requirements when importing goods into the UK and the clearance process would be quicker as fewer physical inspections would be needed. There have been many references to ‘trusted trader’ schemes being a fundamental part of future border arrangements.

HMRC figures estimate that UK companies with AEO status account for 60% of the UK’s imports so there would be a significant number of businesses that would need to gain accreditation in a short period of time.

International trade: Services

The Chequers White Paper was described in an article by Chris Morris on the BBC News website as “…seeking a looser relationship with the EU for roughly 80% of the UK economy.” In the article it was explained that “this is because financial and other services will no longer be able to take advantage of passporting, which gives them automatic access to other EU markets (the UK's Financial Conduct Authority says about 5,500 UK financial firms currently have EU passporting rights).”

It remains to be seen whether the size of the UK’s services sector will result in an accommodation being found with the EU or whether firms will decide to relocate away from the UK to an EU member state to continue to enjoy the ability to sell their services across the EU. It is worth noting though that the UK represents a sizeable market for EU firms and it has already been implied by the UK’s Brexit negotiation team that the EU could lose the ability to sell into the UK if an arrangement to allow UK firms to continue to sell into the EU is not agreed.

In more general terms the no-deal guidance confirms that there would not be changes to the UK’s place of supply rules for services. However, it should be noted that many of the rules rely on simplifications which may not be available after Brexit.

Taking one example; the Mini One Stop Shop (MOSS) which enables UK businesses selling digital services to consumers in the EU to account for VAT due in other member states through the VAT return system of the UK. As with goods, a no deal scenario would most likely require multiple VAT registrations across the EU or have more strict conditions applied to the operation of any simplification. It is likely that this would be the case even with a deal in place as the UK is not likely to be treated as if it were within the EU for simplifications such as MOSS.

The no-deal guidance also makes reference to the EU VAT refund system which the UK would no longer be part of post Brexit. Therefore, UK businesses would be relying on the refund system that each EU country has with non-EU countries, which may have more stringent conditions, and in some cases, countries simply do not refund such claims. Once again this is likely to be the case were the UK to leave with a deal as the refund system is EU specific.

Opportunity in the uncertainty

The UK no longer being part of the EU Single Market and Customs Union would bring opportunities to make different trading arrangements. In previous Crowe updates we have asked whether Brexit could allow the UK government to re-introduce Free Trade Zones (FTZs) as these commonly can assist in boosting manufacturing and to help promote local businesses. We have previously considered the mechanics of what would be involved, both legally and operationally, in establishing FTZs in the UK. Please visit our website for more information on FTZ.

VAT

The UK VAT system is currently based on an EU directive that sets the framework for how Member States’ VAT rules should operate. Over time we would expect a deviation between the UK VAT rules and those of the EU. For example, in the no-deal guidance HMRC acknowledge that the financial and insurance sectors which rely heavily on EU law will be affected, both in terms of the scope of the VAT exemptions in the sector and with regard to certain areas of recoverability of VAT on costs for those businesses. Even with a deal in place it is likely that certain sectors such as this will be considered by HMRC in more detail and changes will occur whatever the trading position agreed with the EU.

UK parliament voted for the UK not to remain in the EU VAT system. Post Brexit, the UK will no longer be bound by EU law so the government could amend the scope of existing VAT rates and rules as it sees fit; leading to greater inconsistency for businesses between the UK and EU’s VAT rules.

Immigration and workforce planning

While a lot of detail of what is to come on the immigration front remains somewhat unclear, we do know that free movement as we know it will end. The key issues for employers are understanding how this will impact their workforce today and in the future.

An immediate area of focus are EU nationals already in the UK workforce. Most organisations will now have compiled lists of EU nationals they employ and a key people concern they will have now is their permanent residency status after the UK withdraws from the EU. Some guidance has been published around settled status. A important consideration for employers is how to support these workers with applications. Going forward, there will be new processes and registration requirements.

Workforce planning is key. If an organisation is able to compare their current EU workforce versus future demands taking into account whether those workers will be readily available or indeed even view the UK as attractive place to work and live; then they can start to understand if they have a deficit. If a deficit is expected the question turns to what can employers do now to influence the future supply of skills and types of workers? For example, what role can apprenticeships play? What role can expatriate tax breaks (that provide reduced tax liabilities for certain non-domiciled individuals) play to increase UK attractiveness as a host for key talent?

Corporate location strategy

Many organisations are already considering and planning to move functions or teams from the UK to EU locations. For others, there may not be moves of offices or teams, but instead, new patterns of people mobility as teams and key executives respond to where their roles require them to be.

The relocation of the European Medicine Agency to Amsterdam is just one high profile example. As this thinking develops, organisations will need to consider the best way of structuring the movements. Relocations bring a whole host of tax issues for the organisation and its employees.

For the organisation there is a need to consider the right corporate set up to facilitate business within the EU while remaining cost competitive and compliant.

This includes understanding the tax regime in the candidate locations and the steps needed to transfer to that location without triggering unexpected tax costs. Where certain key personnel are required to relocate it will be necessary to consider payroll, social security and tax set up. There will be a need to consider whether roles should be local or expatriate in nature. A number of countries in Europe have expatriate tax concessions and tax breaks and leveraging these can be key to ensure costs and budgets are proactively managed.

What businesses can do now

For now, assess the parts of your business’ activities which may be impacted and begin to work on contingency planning.

From an international trade perspective, it can be difficult for businesses to understand all the types of purchases and sales a business makes and the physical and legal flows, but these will all need reviewing to pinpoint the areas that could be impacted. For businesses who primarily trade in goods, the possible creation of a customs border between the UK and elsewhere will result in a change to the import/export process and possibly an increase in customs duty and VAT costs.

For services businesses the issues are likely to be more about the regulatory position and access to the right labour.

Businesses should consider carrying out workforce planning to understand existing and future employee needs to assess the impact of changes to the freedom of movement. Those considering corporate relocations should understand the tax implications for both the organisation and its employees for all of the candidate locations being considered.

We are aware of many businesses that are taking some or all of the following actions:

  • Appointing a steering committee to oversee Brexit developments.
  • Identifying the areas of the business which could be impacted by Brexit and the different trading models that may arise.
  • Identifying the tax technical concerns that exist.
  • Reviewing the no-deal guidance as an indicator of how the VAT system will operate with no-deal, but also that this may reflect the position even with a deal (where the UK is outside the VAT and Customs regimes of the EU).
  • Starting to model the possible indirect tax changes/ costs that could arise.
  • Considering practical impact on systems and procedures.
  • Continuing to monitor developments.
  • Working with trade bodies/ industry associations to share concerns and gather intel.

Contact us

Robert Marchant
Robert Marchant
Partner, VAT
London