More than 130,000 UK firms will be forced to pay VAT upfront for the first time on all goods imported from the European Union after Brexit, under controversial legislation to be considered by MPs on Monday.
The VAT changes spelled out in the taxation (cross-border trade) bill – one of a string of Brexit laws passing through parliament – are causing uproar among UK business groups, which say that they will create acute cashflow problems and huge additional bureaucracy.
Labour and Tory MPs and peers said that the only way to avoid the VAT Brexit penalty would be to stay in the customs union or negotiate to remain in the EU-VAT area.
On Sunday night the Tory chair of the all-party Treasury select committee, Nicky Morgan, said the committee would launch an urgent investigation. She also said she would be writing to the head of HM Revenue and Customs to see what contingency plans were being made to avoid hitting UK firms.
The bill, which has its second reading in the Commons on Monday, spells out clearly how VAT would have to be paid upfront by companies. The government’s own explanatory notes on the bill say the existing regime will end “so that import VAT is charged on all imports from outside the UK”.
The Labour MP and former minister Chris Leslie said that the VAT hit to firms was “yet another aspect of Brexit that the Leave campaign failed to inform the public about”. He added that he would be tabling urgent amendments to ensure the UK remained in the EU VAT area – a move that would enrage pro-Brexit MPs.
UK companies that import machine parts or goods ready for sale from the EU can currently register with HMRC to bring them into the UK free of VAT. They register the VAT charge and reclaim it later, all as a paper exercise. VAT is added to the price of the product whenever it is sold to the final customer.
Without a VAT deal with Brussels, importers will have to pay the VAT upfront in cash and then recover the money later, creating a huge outflow of funds before they can be recouped.
VAT experts say the imports of services operate separately, with most relying on the exporter to account for VAT. This is expected to remain the situation, although travel companies and financial services firms operate under special arrangements and could face extra costs without a specific agreement covering their industries.
In a briefing sent to MPs, the British Retail Consortium, which represents 70% of the UK retail industry, said: “If the bill becomes law without any commitment to inclusion within the EU VAT area, UK businesses will become liable to pay upfront import VAT on goods being imported from the EU-27 for the first time.”
It added: “Liability for upfront import VAT will create additional cashflow burdens for companies, as well as additional processing time at ports and border entry points attached to the customs process. Mitigation measures could include companies instituting a revolving credit facility, or utilising import VAT deferment reliefs.
“Both measures require companies having to take out costly bank or insurance-backed guarantees, so would increase the costs of importing goods from the EU.”
Morgan told the Observer: “One of the things that has not been explored fully is the implications for tax from Brexit. As Brexit comes closer we are beginning to see the reality of how it will bite. The same businesses that are going to be hit by new customs arrangements also face being affected by new VAT rules.”
The Tory peer and former editor of the Sunday Telegraph, Patience Wheatcroft, said it would be “very difficult” to get round the problem of upfront VAT charges for UK companies doing business with remaining EU member states “unless we stay in the customs union”.
The chancellor of the exchequer, Philip Hammond, said: “Britain is a great trading nation, and innovative UK businesses are central to the success of our economy.
“This bill represents the first step in setting up an independent UK customs regime and reaffirms our commitment to deliver a smooth transition for businesses as we leave the EU.”
Treasury sources added that the precise nature of the UK’s future customs relationship with the EU would be the subject of Brexit negotiations with Brussels.