Here’s Why Tax Will Give Brexit Negotiators a Headache in 2018

Trust Bloomberg Tax for the international news and analysis to navigate the complex tax treaty networks and global business regulations.

By Ben Stupples

The U.K. has just over a year before it is expected to leave the European Union. For the country’s tax authority, though, there is a much closer deadline.

The end of March will mark the date that senior officials from Her Majesty’s Revenue and Customs set the government to finalize its post-Brexit terms on border taxes with the EU.

That tight timeframe comes as the U.K. and EU agreed Dec. 18 to move on to the next step of Brexit discussions. This stage will resolve the U.K.’s post-Brexit terms for customs, value-added tax and excise duty, but official talks can’t begin until EU ministers next meet Jan. 29.

“Brexit is probably the biggest thing that’s happened for U.K. customs and excise duties in 50 years,” Simon Sutcliffe, an indirect tax partner at global accounting firm Blick Rothenberg, told Bloomberg Tax. “It’s not about how this is going to pan out in two years—it’s the next decade at least.”

Brexit Transition to 2020

While the U.K. doesn’t have to impose customs or excise duties, or VAT, on imports or exports between member states while it’s in the EU, the levies apply when the country leaves.

When it exits, the U.K. wants to have access to the EU’s single market for a temporary period to give businesses a smooth transition. In a Dec. 20 news release, the European Commission said this period “should not last beyond” 2020, granting the U.K. a timeframe of more than 18 months.

“We want to be as close to the EU as political red lines allow us, effectively meaning that any future customs regime has to be EU-like—even if we have a hard Brexit” and thus no transition period, John Cullinane, the U.K. Chartered Institute of Taxation’s tax policy director, told Bloomberg Tax.

U.K. Treasury Customs Bill

HMRC calculates that 132,000 businesses will make customs declarations to it for the first time due to Brexit, as they currently trade only in the EU, according to a Nov. 13 parliamentary report.

To prepare for the U.K. leaving the EU, which accounts for most U.K. trade, the Treasury published draft laws Nov. 21 to allow the government to establish its own border-tax regime in 2019.

Lawmakers will debate the legislation for the first time in January 2018. Looking beyond that date, though, HMRC is already seeking input on how businesses might adapt to a new customs regime that the U.K. Treasury outlined in its October 2017 policy paper on post-Brexit tax plans.

HMRC issued on Dec. 12 a bidding process for consulting firms to help the tax authority assess the technical impacts of a new customs partnership with the EU, according to a person with knowledge of the announcement, who asked not to identified because the matter is private. At the same time, HMRC is consulting on U.K. businesses’ “readiness” to switch to a new system, the person added.

“As Brexit approaches, more businesses are focusing on how they can’t ultimately make certain decisions,” Brad Ashton, a London-based indirect tax partner at global accounting firm RSM UK, told Bloomberg Tax. “But they can identify what strategies to consider for the implications of it.”

Post-Brexit Finance and VAT

In addition to the terms of customs and excise duty, the U.K. may have to negotiate with the EU over the next year how another indirect tax will apply post-Brexit to its financial services industry.

Under EU law, companies within the bloc that provide financial services outside member states can reclaim value-added tax. Brexit subsequently triggered hopes among the U.K.’s finance sector that companies may one day be able to reclaim VAT on services they supply to EU member states.

The VAT exemption would be a boost for the U.K.’s financial services sector, the largest contributor to the country’s corporate tax base, as it faces losing business due to Brexit. Set at a 20 percent standard rate, meanwhile, VAT is one of the U.K.'s biggest revenue-raisers, bringing in 21 percent of the 569.3 billion pounds of total taxes collected in the latest financial year.

Yet perhaps due to the importance of VAT and financial services to the U.K.’s public finances, the Treasury hasn’t given any hints yet to tax practitioners on its intentions for the exemption.

“The automatic post-Brexit assumption was we could get our VAT back,” Daniel Lyons, a London-based indirect tax partner at Deloitte LLP, told Bloomberg Tax. “An exemption would be a substantial issue for a range of businesses that are extremely competitive.”

Quick Transition Deal ‘Crucial’

A Treasury spokeswoman told Bloomberg Tax the U.K. and EU will decide on the exemption in their negotiations.

But a spokesman for U.K. Finance, the financial services trade association, told Bloomberg Tax that they have “had discussions” with the Treasury on the issue. “Any future decisions on VAT will be taken by the government as part of its on-going negotiations with the EU,” he added.

A spokeswoman for the City of London Corporation financial district, meanwhile, cited the damaging uncertainty that exists in the absence of an agreement for a post-Brexit transition period.

The lack of clarity on the exemption reiterates the “myriad of unanswered questions for financial firms when it comes to Brexit,” she told Bloomberg Tax. “To ensure a smooth transition into the new trading relationship, it is crucial that Government secures a transitional arrangement—and quickly.”

To contact the reporter on this story: Ben Stupples in London at bstupples@bloombergtax.com

To contact the editor responsible for this story: Ryan Tuck at rtuck@bloombergtax.com

Copyright © 2018 The Bureau of National Affairs, Inc. All Rights Reserved.

Request International Tax