Following the UK referendum, the impact of leaving the EU will have far reaching implications for VAT and Customs Duty.
With the UK voting to leave the EU there will be VAT & Customs Duty changes for both UK businesses and global businesses trading with the UK. Whilst there is the much discussed uncertainty as to which of the many trading models the UK will ultimately negotiate and how it will access Free Trade Agreements (FTAs) etc., it is clear that every international trading business will be required to undertake a thorough review of its supply chains. It is only through having an in-depth understanding of the existing supply chain models and identifying how VAT and Customs Duty currently apply that business will be able to begin to assess the impact of any required changes to their VAT and Customs Duty accounting and administration, and proactively plan to manage these changes. We recommend that businesses adopt a proactive approach to assessing the indirect tax impacts of leaving the EU.
For VAT, the forthcoming transition from dispatches to exports and from acquisitions to imports will introduce changes to procedure as well as cash flow profiles of trading activities.
Leaving the EU will mean that UK VAT law will no longer be required to adhere to EU VAT law. Where your business takes advantage of reliefs or benefits underpinned by an EU law right, it is prudent to assess the impact on its operations if such reliefs/benefits were to be at risk in the future. Armed with this information, business can proactively influence the debate on the application of the UK’s VAT and Customs Duty rules in the future.
The EU is a Customs Union - this allows freedom of movement of goods between Member States without customs formalities/duties/tariffs. Leaving the EU Customs Union would almost certainly mean that customs formalities and duties/tariffs will, by default, be imposed on UK-EU trade in goods.
The administrative costs of trading with the EU will increase due to the re-imposition of customs formalities. These could include challenges such as the real time preparation and submission of customs declarations, determining origin of goods, delays in movements of goods due to customs clearance procedures, providing financial securities, registration requirements for customs (EORI) and VAT purposes and the cash flow impact of moving from acquisition to import VAT accounting.
In addition, the UK may no longer be able to take advantage of the EU’s FTAs with countries such as Mexico, South Africa, Chile, Switzerland, South Korea (as well as ones in the pipeline e.g. USA, Canada, Japan). While this could lead to a better or worse position than the current agreements afford, negotiations take time and in the meantime business has to operate in the fog of uncertainty.
In the context of political uncertainty as to what the ultimate outcome of our decision on 23 June 2016 will mean, there is the natural temptation to want to wait and then react to the new reality when the negotiations have concluded and the nature of the changes is certain. It is equally clear that Article 50 and the orderly mechanism by which a Member State leaves the EU provides a period of time in which to analyse, decide and implement changes.
In the context of efficiently managing indirect taxes, our recommendation is to start the process of assessing the indirect tax impact on your supply chains and operating models without delay. In order to help businesses we have developed an impact assessment methodology for managing indirect taxes. The output of this phase of work will allow you to focus your time and resources on the material opportunities and challenges, while at the same time unearthing areas to improve your VAT and customs duty position.
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