The UK leaving the European Union could leave those business who acquire goods from the EU with a potential cashflow burden. In this blog, VAT Director Iain Masterton looks at how Brexit will affect those businesses and what these businesses might want to consider in anticipation of these changes.
The UK is now just a year away from leaving the European Union (EU). However, the transitional stand still period with existing rules will continue until 31 December 2020. If, as is likely, the UK does not remain part of any Customs Union or the Single Market, UK businesses should be starting to think about how leaving the EU might affect them.
How will this effect businesses?
At present, VAT on purchases of goods from other EU businesses is accounted for under the ‘reverse charge’ procedure on the buyer’s VAT return. No VAT is charged by the supplier and the VAT charge is accounted for by the buyer and then recovered on the same VAT return, which in most cases results in a nil adjustment. Most UK businesses do not have a VAT cost or cashflow burden under these provisions.
If there is no agreement to remain within the Single Market, from 1 January 2021 UK business who previously purchased goods from the EU will be treated as ‘importers’ and will have a liability to pay import VAT (and Customs Duty) on the majority of goods when the goods come into the UK from the EU.
In some instances, businesses might have to wait up to 3 months in order to recover the import VAT from HMRC on their VAT returns. In addition, Customs Duties that apply will be an additional cost.
This could negatively impact on the UK businesses’ cash flow and working capital, and could potentially lead to increased bank guarantee charges if they operate an import VAT/duty deferment accounts.
It has also been mentioned in some quarters that the UK Government could introduce a postponed accounting system to address the cashflow issues. However, as has been pointed out by a number of commentators, business who purchase goods in the UK have to pay VAT up front so it remains to be seen what measures might be adopted and accepted by the Government to address this.
What importers should be doing
Any UK business that buys goods from EU suppliers should be looking at the activities which they currently undertake which will be affected by the Brexit changes.
As outlined above, there are relief measures that could be used such as inward processing relief, duty deferment and customs warehousing which could be considered even at this stage.
Another advisable action is to apply to HMRC for AEO status. This is an internationally recognised quality mark indicating the business’ role in the supply chain is secure, and that Customs controls and procedures are efficient and compliant.
HMRC is likely to be burdened with increased applications as Brexit approaches as more and more UK businesses are worried about potential disruption/delays to their post-Brexit EU/UK goods movements.
If you have a query about the effect Brexit will have on UK importers, please contact Iain.Masterton@chiene.co.uk or call 0131 558 5800.