VAT Recovery and Brexit

10 Jun

Brexit and what it means for VAT

VAT Recovery and Brexit

What do we know? Well, the UK will almost certainly be leaving the Single Market and from this, we can derive a clear set of inevitable consequences. Namely, that there will likely be customs control on goods and it will be the end of Single Market VAT rules for Britain.

  • So, as we head toward Brexit, and exiting the single market, there are a number of options available to the UK:
    EEA Market as per Norway, Iceland and Liechtenstein’s agreement.
    This allows for free movement of goods, capital, services and people (with some exclusions), and some participation (voting) rights in several of the EU’s programmes, bodies and initiatives. There is a requirement to make a financial contribution to the EU budget in line with GDP (gross domestic product)
  • EFTA Market as per Switzerland’s agreement.
    Switzerland has a series of bilateral treaties that enable them to participate in the EU’s single market. Whilst different to the EEA Market, it does allow for free movement of labour and there is also a requirement to make EU budget contributions.
  • Customs Union as per Turkey’s agreement.
    Turkey has been a candidate country to join the EU since 1999. At present, the CU Agreement limits EU trade participation to certain products (non-agricultural), Turkey has no influence on policy i.e no voting rights like Norway or Switzerland but they must still make EU budget contributions.
  • Free Trade Agreement
    One consequence of the UK’s membership of the EU is that many aspects of the UK’s external relations (with non EU countries) are currently conducted partly or wholly through the EU. A free trade agreement will enable the UK to negotiate and agree import quotas and tariffs with other countries that are directly beneficial to the UK.
  • World Trade Organisation
    If Britain fails to reach a trade deal with the EU after Brexit (Options 1, 2 & 3 above), it will have to fall back on the WTO option. This would involve trading solely under rules set by the WTO which governs things like tariffs and quotas. Britain is already a member of the WTO however when negotiating trade deals it has operated under the EU. In order to negotiate new deals Britain would need to negotiate these new schedules for themselves.

The government document published in February 2017, “The United Kingdom’s exit from and new partnership with the European Union White Paper”, makes a number of statements that indicate the UK will pursue the option of a Free Trade Agreement. “We will pursue a bold and ambitious Free Trade Agreement with the European Union” is a clear message that the UK intends to continue a strong trade relationship with the EU and EU countries but outside of the EEA, EFTA or CU. The government wants to ensure cross-border trade with the EU continues as seamlessly as possible. But how quickly and easily will that come about? We simply don’t know yet.

We do know that the UK will no longer be part of the EU Single Market. Therefore:

  • The Union Customs Code (UCC) will no longer apply to the UK
  • Trade barriers will re-appear as will certification requirements
  • Customs duties could be introduced with associated costs to businesses
  • Movements will become subject to customs formalities and there will be a significant increase in customs declarations, processing costs, requirement for in-house expertise and associated customs compliance costs
  • Cost of using additional customs procedures (e.g. bonded warehouses for holding goods) to mitigate customs duty impact
  • Risk of delays at borders
  • Challenges for integrated supply chains.

The White Paper also states, “It is time for Britain to get out into the world and rediscover its role as a great, global trading nation”. The clear message here, being that the UK intends to continue to improve trade relationships with existing and new trade partners.

So, the UK may lose existing Free Trade Agreements in place under the EU and will therefore have to try to accelerate FTA negotiations with existing EU FTA partners such as Canada to ensure these are in place at the time of Brexit.

The UK may become subject to a Customs Union Agreement similar to Turkey though it is unlikely the UK will want to be subject to EU policy without being able to influence it and still have to make contribution to the EU budget.

The UK will however be free to negotiate and agree new Free Trade Agreements and will likely try to do so with strategic trade partners such as the USA, Australia, New Zealand, India and the Gulf States.
In summary, whilst we do not yet know the implications of Brexit, we can assume at this stage that Britain will no longer be part of the Single Market and will likely seek Free Trade Agreements with a variety of countries to continue trade.

As a consequence, the EU VAT refund portal is unlikely to be available to UK businesses for VAT refunds in EU countries.

Although the full impact of Brexit on EU VAT refunds for UK businesses is still unclear, UK businesses will inevitably be treated as any other non-EU country for VAT refund purposes.

One clear impact of the change is that original invoices will be required to support any VAT refund claim in an EU country, irrespective of the amount of the invoice. Therefore, we should be encouraging any clients who recover their VAT to ensure that they begin storing original invoices for EU VAT reclaims as soon as possible. Many of our customers currently scan invoices and then destroy the originals. Once the UK is no longer part of the EU, any VAT on these invoices would be lost. As the timing of Brexit is unclear, the safe option is to ensure UK client retain originals as soon as possible.