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Ed's Brexit round-up

1st Jun 2018 / By Alistair Driver

A VAT lot of good, this Brexit business.

EdBarkerNPAOne thing that has started to emerge throughout the Brexit process has been the farm accountant’s great friend: VAT. Having spoken to a number of trade specialists over the past few weeks, it is evident that VAT will be the quiet force behind seriously complicating Brexit plans for the Government.

To row it back a bit, VAT is a requirement of EU membership and the UK introduced it when it joined the EU, and the UK is part of a common VAT area. The EU does not demand a fixed standard VAT rate—it varies from 17% in Luxembourg to 27% in Hungary—it sets guidelines. There is a minimum standard VAT rate of 15%, and a maximum of two reduced minimum rates of at least 5 per cent that may be applied to a limited set of goods and services. The UK has additional allowances in place allowing it to 0% tax certain products. It is widely assumed that with Brexit, the UK will leave this common VAT area.

UK firms importing goods from the EU  register with HMRC to bring them into the UK free of VAT. They register the VAT charge and reclaim it later; VAT is added to the price of the product whenever it is sold to the customer. Without a VAT deal with the EU, importers will have to pay the VAT upfront in cash and then recover the money later from HMRC, creating possible cashflow problems for smaller businesses, and time delays at a border. This clearly would affect goods in food products that require speedy logistics. It would also be a necessary to create a new IT system that would be able to administer the payments (I will try not to mention the RPA as an example of Government IT systems).

We could of course stay in the common VAT area, however it is overseen by the European Court of Justice with common VAT rules – a red line for many Brexiteers who used VAT as an example of why the UK should leave in the first place. Without looking at it in close detail, the UK could be opening themselves up to massive fraud; paying out VAT rebates on goods that may never have been exported at all and failing to tax goods coming in. So it is another sovereignty / expediency / political will issue – but a dry and complicated one.

One thing is for certain, don’t expect VAT to go away. It accounts for about 18% of all tax income after all.