The European Commission has warned companies across Europe to prepare for significant border friction and costs after the UK leaves the EU’s value added tax area.
In a notice to firms earlier this month, the commission cautioned UK exporters that in the event of a “hard” Brexit, VAT would be payable upfront at the border and British importers would no longer be able to claim refunds for foreign tax using electronic systems.
The commission also said UK companies operating in the EU may be required to employ a representative to handle VAT payments in the bloc, and UK suppliers of digital services to the EU would have to register with the tax authorities in each country.
The notice is the latest example of “unilateral statements” from Brussels about “no deal” scenarios that UK Brexit secretary David Davis has said are “damaging” UK interests.
Both the commission and the UK government have stressed that the final VAT rules for crossborder transactions will depend on the outcome of Brexit negotiations.
The EU has signed its first VAT co-operation agreement with a non-bloc country, Norway, just last week . But Norway is in the EU single market and has a “similar VAT system” to the EU, which officials say means a comparable deal with the UK cannot be guaranteed.
If the UK does not negotiate a VAT agreement with the EU before leaving the bloc, nearly 3m UK small businesses that are currently exempt from paying VAT because they generate turnover of less than £85,000 a year will have to start paying VAT on sales to EU customers.
Mike Cherry, national chairman of the UK Federation of Small Businesses, said VAT is “the most time-consuming tax” for his members, adding that maintaining frictionless EU trade “needs to be the top priority for Brexit negotiators”.
“Nine in ten small firms [in the UK] that do business internationally have ties to Europe,” he said.
Many businesses have been concerned about potential cash flow problems if the UK leaves the EU VAT area, because tax will have to be applied at the border rather than under the current EU system, where goods are transported tax-free and VAT is applied through company accounts.
The British Retail Consortium has complained that companies are facing “unexpected cash flow bombshells”.
UK ministers have suggested VAT payments could be deferred in order to ease pressure on companies.
But customs officers would nevertheless need to check goods were being properly declared at the borders to stop products coming into the UK and the EU tax-free.
Jeremy Cape, tax partner at Squire Patton Boggs, said that many of the issues “should be manageable” if there was sufficient co-operation between London and Brussels.
Yet Mr Cape warned that the UK’s suggestion in a recent white paper that people would still be able bring unlimited goods into Britain “for personal use”, opened up a serious opportunity for fraud in any new system, as they could receive a refund on Irish or French tax paid before taking the goods into the UK.
The commission and the UK Treasury declined to comment.