Brexit Myth Busting: Separating the Fact From Fiction for all Things Tax

David Stokes
January 31, 2021

There is a plethora of misinformation and misconceptions surrounding Brexit and tax. The aim of this blog is to dispel such myths and clear up any confusion. We will dig deeper into news stories to explain the facts and keep you informed.

Brexit Myth 1 – Brexit’s unique taxation regime for EU imports

The story:

Immediately following the end of the transition period and the beginning of Brexit, the UK launched a ‘unique taxation regime’. This is in respect of importing goods for sale to private individuals.

A Dutch bike company posted an article on its website inviting readers to contact their elected representative in the UK. They asked them to complain about the new tax changes that prevented them from selling to UK customers.

This was picked up by several media outlets including the BBC “EU firms refuse UK deliveries over Brexit tax changes.”

The facts:

Sellers established outside the UK charge UK VAT to private individuals where the shipment value is less than £135. As stated in a change to UK VAT law introduced on 1 January 2021.

The intention is to protect UK businesses from cheap foreign imports and to increase the tax take. The abolishment of ‘low value consignment relief’ (LVCR) achieved this. Ensuring payment of VAT on the real value of the goods.

For example, last year I could have gone on to Amazon to buy cycle parts. I might find that an EU cycle company would charge me £18 for a spare part. However, the same parts from a supplier in South East Asia might cost me £15.

This is because EU cycle parts companies must charge EU VAT (either NL or UK). Whereas the supplier outside of the EU could use Low Value Consignment Relief (LVCR) to legally bypass the payment of VAT. Some suppliers exploited this relief further by declaring that goods worth £30 were only worth £15. An example of fraudulent application of the LVCR.

But the decision to abolish LVCR is not a ’unique taxation regime’ launched by the UK. It already exists in several other countries including Australia, Norway and Switzerland and will soon be introduced by the EU.

EU vendors complained for years about unfair competition and the EU was also concerned by the loss of VAT revenue.

Taking this into account the EU launched a consultation period. The result was the E-Commerce VAT Package. It requires VAT payment by the vendor when importing goods into the EU and sold to private individuals; where the goods value is less than €150. The abolishment of LVCR is also part of this package.

The EU delayed the package, originally due for implementation on 1 January 2021, until 1 July 2021. As can be seen from the above, this will create similar issues as currently mentioned by some EU suppliers. They will, ironically, be the beneficiaries of this ‘unique taxation regime’. These suppliers will no longer face unfair price competition from suppliers outside of the EU.

The UK identified the same issues of unfair competition and tax leakage. On 1 January 2021 introduced legislation requiring vendors to account for VAT when importing goods with a value below £135 and sold to private individuals.

It is a fact that additional costs will incur in respect of customs formalities when importing goods into both the UK and the EU.

Brexit Myth 2 – UK goods shipped to the EU now liable for additional VAT charges

The story:

New rules mean goods shipped to EU countries are now liable for VAT when they enter the single market. A story appeared in Yahoo Finance with the headline “£34bn Brexit bill pushes companies to the brink”, where a tax reclaim company had estimated that levies could add £34bn ($47m) to the cost of UK trade with the EU.

The predication is that new post-Brexit VAT rules are adding billions of pounds to operating costs with import VAT. Possibly as high as 27%, imposed as a cost.

Darren Jones MP, the chair of the Commons’ Business, Energy and Industrial Strategy Select Committee, described the increased costs as a “kick in the teeth” for businesses and asked for the government to intervene.

But the £34bn ‘cost’ is just a myth.

The facts:

Any business importing goods into the EU need to pay import VAT on the relevant value. After importing the goods into the EU, they will normally be sold and be subject to local VAT – as is the case when importing goods into the UK and sold locally.

VAT is a neutral tax for business. So there is no real possibility of UK companies losing £34bn (or any VAT at all) if they act appropriately.

For example, a UK business imports goods into Germany from Great Britain and then sells them. Normally there is a requirement for the UK company to obtain a German VAT number and charge German VAT to its customer. It then offsets the import VAT it has paid against the output VAT it charges and remits the balance to the German tax authority.

When goods are imported ready for sale the import value is the same as the sales value. So, if a UK company imports goods worth €10,000 into Germany where no duty is applicable it will pay import VAT of €1,900. It will then sell these goods for €10,000 and charge €1,900 of output VAT. The import VAT is offset against the output VAT meaning all import VAT is fully recovered. There will, of course, be professional costs incurred in dealing with the German tax authority.

There are now 27 EU Member States and the VAT rules are not unified. It’s therefore possible that a UK business could incur import VAT and not have the requirement to charge output VAT so that offset isn’t possible.

In this case there is a refund mechanism to enable the UK company to recover the import VAT. Once again, there is a cost associated with this. However, Member States can refuse to accept a claim so that the import VAT is a real cost.

In short, import VAT is not a £34bn cost if businesses manage their affairs efficiently and compliantly. Changing incoterms so that the customer is the importer would solve all these problems. A full and thorough analysis of the position would enable UK businesses to recover import VAT and remain compliant, thereby reducing the possibility of penalties.

Similar principles apply to sales to private individuals. UK companies making such sales should also be able to benefit from the principle of tax neutrality if they act appropriately.

Take Action

Keen to know how Brexit will impact your VAT compliance? Download our recent webinar Brexit and VAT: Protect your valuable supply chains and minimise costly disruptions to find out more.

Sign up for Email Updates

Stay up to date with the latest tax and compliance updates that may impact your business.

Author

David Stokes

As an FCCA of many years, David brings a commercially focused accounting perspective to the treatment of European VAT issues. He specialises in the understanding of cross-border VAT transactions and has helped many clients map their flows to optimise their VAT position. He has successfully completed the VAT Forum’s ‘Expert in European VAT’ course and is a partner of the forum. As well as advising clients David also sits on several technology product development teams at Sovos.
Share this post

motor insurance taxation in Italy
EMEA IPT VAT & Fiscal Reporting
September 26, 2024
Taxation of Motor Insurance Policies: Italy

In Italy, the insurance premium tax (IPT) code (which is being revised as of the date of this blog’s publication) and various other laws and regulations include provisions for taxes/contributions on motor hull and motor liability insurance policies. This article covers all you need to know about this specific indirect tax in the country. As […]

IPT warranty services
EMEA IPT VAT & Fiscal Reporting
August 30, 2024
Applicability of IPT to Warranty Services

Italy: IPT Treatment on Used Vehicle Warranty Services On 21 May 2024, the Italian tax authority published a ruling (No. 110/2024) on the IPT treatment of warranty services provided in relation to the sale of used vehicles. The ruling dealt with a scenario in which a company (the ‘Applicant’) provided warranty services to dealers within […]

Hungary Supplemental Insurance Premium Tax
EMEA IPT
July 11, 2022
Extra Profit Tax: An Introduction to Hungary’s Supplemental Insurance Premium Tax

Update 7 October 2024 by Edit Buliczka Hungarian Tax Office Updates IPT Declaration Form for 2023 The procedure necessary to correct an underdeclared premium figure in Hungary can be complicated. The complexity of a correction for return form 2320 has become even more challenging. Following a Sovos query, the Hungarian Tax Office (HUTA) updated the […]

what is peppol
E-Invoicing Compliance EMEA North America
October 29, 2024
What it is PEPPOL?

Peppol E-invoicing explained: What it is and how it works The global adoption of electronic invoicing is accelerating. Governments worldwide are pushing to adopt e-invoicing to digitally transform their national systems and, often, to close the VAT gap. While many countries have introduced their own e-invoicing mandate to digitise fiscal controls, the requirements and systems […]

French tax authority cancels free invoice exchange
EMEA VAT & Fiscal Reporting
October 16, 2024
How Do Changes to the French e-Invoicing Mandate Impact My Business?

By Christiaan Van Der Valk  The French tax administration has just announced structural changes to the 2026 French e-invoicing mandate that will discontinue the development of the free state-operated invoice exchange service. This decision will put increased pressure on taxpayers and software vendors to select a certified ‘PDP’ to fill the void created by this […]

EMEA Tax Compliance
September 6, 2024
What is SAP Clean Core and What Does that Mean for Tax? Part I

What is SAP clean core? It’s about being cloud-compliant…are you? Find out benefits and implications in part one of Sovos’ five part series.