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
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.”
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
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.
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.
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.