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Jeremy Cape Squire Patton Boggs, U.K.
Jeremy Cape is a Partner with Squire Patton Boggs, U.K.
The U.K. Government’s suggestion for a standalone VAT regime has started to unfold in a recently published policy paper on the country’s future customs arrangements—to ensure “the UK is prepared for all possible outcomes.”
At Squire Patton Boggs, I have two roles: one is an international tax partner and the other is a public policy partner specializing in Brexit more generally. I knew that the government paper published August 15, 2017 ( http://src.bna.com/rGW), on customs arrangements after Brexit would have some interesting things to say about trade but I didn't imagine it might have something to say about VAT.
It didn't exactly have a lot to say about VAT. This is what it said:
…without any further facilitations or agreements, the UK would treat trade with the EU as it currently treats trade with non-EU countries. Customs duty and import VAT would be due on EU imports. Traders would need to be registered. Traders exporting to the EU would have to submit an export declaration, and certain goods may require an export licence. The EU would also apply the customs rules and VAT to imports from the UK that it applies to non-EU countries. The Government is actively considering ways in which to mitigate the impacts of such a scenario. Other EU Member States will also need to make contingency preparations to mitigate the risk of delays resulting from their own customs processes.
It's worth taking a step back to remind ourselves how VAT works in relation to supplies of goods. Geographically speaking, you have essentially three categories of supplies with different rules applying: U.K.–U.K., U.K.–EU and U.K.–non EU.
One big difference between the latter two categories is the way in which imports of goods by businesses are treated for VAT purposes. Broadly speaking, imports of goods from outside the EU are subject to import VAT, which means the importer needs to fund the payment of input VAT, and then reclaim it from HM Revenue & Customs (“HMRC”) (to the extent it is entitled). Imports of goods from inside the EU are subject to acquisition VAT, which doesn't involve the actual payment of input VAT on import, but instead involves the U.K. business accounting for the input VAT through its VAT return.
I had rather assumed that the U.K. Government would accept that, as a result of leaving the EU, there would no longer be a category of U.K.–EU supplies, and all imports from outside the U.K., including from the EU27, would be subject to import VAT, and that this was an acceptable cost of achieving Brexit.
I noticed the online Telegraph headline “Britain threatens to impose VAT and customs duties on EU imports if there is no Brexit deal” and thought I'd take to Twitter to shame the Telegraph for not understanding how VAT works. And then I took a closer look at the government paper.
The wording in the paper is vague and ambiguous. It is more vague and ambiguous than is desirable, a year after the referendum and nearly five months after triggering Article 50. But it certainly seems to suggest that the government considers that applying import VAT where goods are brought in from the EU is something which should, and can, be avoided.
I've tried to think of a few policy scenarios, and I keep coming back to this one. The U.K. wants to reach an agreement whereby supplies of goods between the U.K. post-Brexit and the EU27 are treated for VAT purposes in the same way as they are pre-Brexit.
The problem is that, assuming the EU27 are prepared to amend Directive 2006/112/EC to provide for this, which is a big assumption, two other things will also follow:
Neither of these sounds acceptable within the context of the Brexit red lines laid out by the government itself. I certainly didn't expect the U.K. to seek to have its (chocolate-covered) cake and eat it in relation to VAT. Let us see how the EU responds.
Jeremy Cape is a Partner with Squire Patton Boggs, U.K.
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