After months of waiting, Theresa May’s speech on 17 January gave us our first real insight into the Government’s plan for the UK’s exit from the EU. 4 key principles and 12 specific goals. Hugh Doherty, Indirect Tax Senior Manager at Grant Thornton, explores what this could all mean and some of the key things that businesses should be thinking about now in relation to their indirect tax position.

The ongoing political and economic debate has mostly been about immigration and whether the UK would need to retain the right of freedom of movement of people as part of any deal on the Single Market. The prime minister has now indicated that the UK will not retain the “Four Freedoms”, most notably in respect of the movement of people. She has also reiterated Philip Hammond’s threat that if the EU failed to offer a good deal, the UK could move to become a low-tax regime, talking tough before negotiations have even begun!

This approach is expected to have a major impact on the likely trade model that can ultimately be adopted and consequently the tax impact for local businesses engaged in international trade across both the EU and the rest of the world “ROW”.

Trading in the new post-Brexit world

As part of the EU Member States’ customs union, the UK currently has access to free movement of goods and services plus access to Free Trade Agreements (FTAs) negotiated at EU level with countries outside of the EU.

Leaving the EU will be the most significant change to UK trading arrangements and the indirect tax regime for decades. When the UK leaves the EU, goods that cross the border will potentially be subject to customs duty and VAT would, in principle, be payable.

As the UK government is unlikely to accept the free movement of people adopting a model similar to the Norwegian (EEA) or Swiss (EFTA) models which allow free access to the single market (subject to one or two administrative hurdles) appears to be out of the question. This would require the EU to give extraordinary concessions to the UK without much in return.

The UK may be able to negotiate its own comprehensive trade deal with the EU, with the UK only retaining elements of customs union membership, we may end up in a similar position to Turkey, which, whilst not a member of the EU, is part of a customs union agreement with the EU for industrial goods only. As such there may not be a requirement to pay import duty on certain goods imported from other EU member states if an agreement can be reached. Alternatively, we may adopt a bilateral trade arrangement similar to that operated by Canada, which will leave the UK outside of the customs union altogether. This will require us to negotiate a new free trade agreement with the EU on a product by product basis.

Where no agreement can be reached, the default World Trade Organisation rules will apply. In other words, the applicable customs duty rates would be per the WTO with no preferential agreements. Theresa May stated in her speech that she would rather have no Brexit deal than accept a bad Brexit deal. Such an eventuality is, unfortunately, not outside the realms of possibility.

Whatever the final result, by leaving the EU, it seems highly likely that, by 2019, there will be at least some form of customs border between the UK and the EU, leading to businesses having to complete import and export declarations for goods crossing our borders and to an increased cost of compliance. Whether any reliefs will be available will be determined by the final model adopted, which now appears wholly dependent upon how receptive the EU is to allowing the free movement of goods, without the free movement of people.

Theresa May, Prime Minister – Creative Commons – UK Home Office

Impact on European case law and administrative reliefs

On the day the UK has formally broken away from the EU, the Prime Minister also confirmed the laws in the UK will be the same as the were the day before. This will likely mean that the UK courts may still be required to take account of decisions of the Court of Justice of the European Union (CJEU).

Nevertheless, businesses should consider what indirect tax EU simplifications/reliefs they currently benefit from and which are expected to change or be lost under Brexit.

Most notably:

  • EU VAT simplifications – MOSS (Mini One Stop Shop), triangulation, distance sales
  • EC Eighth Directive reclaims for foreign VAT
  • Place of supply – Use and Enjoyment
  • Input VAT recovery – Partial Exemption

Some of the above will impact specific industries (for example, suppliers of electronically supplied services would be impacted by a loss of the MOSS scheme) whereas the others will be relevant to businesses across a range of sectors (for example, the refund of foreign VAT under the EC Eighth directive).

At least there will no longer be an obligation to complete EC Sales Lists or Intrastat declarations!

So what should businesses do now?

Whilst the effect of Brexit is not yet entirely clear, what is certain is that the UK’s exit from the EU will bring about significant change. Businesses will need to consider their strategic options, including the potential VAT and customs consequences. Businesses should take appropriate measures to mitigate any possible tax leakage.

Specifically, for businesses that primarily trade in goods, the likely creation of a customs border between the UK and elsewhere will result in a change to the import/export process and possibly a significant increase in customs duty and VAT costs. This may have a profound impact on many supply chains and these should be reviewed now to ensure that they are robust enough to survive in the new economic and fiscal landscape.