For the 132,000 businesses that currently buy goods from the EU, they are now realising that Brexit is going to hit their cash flow hard, possibly their bottom line as well as supply chain delays says leading accountants PKF Francis-Clark.
The reason is that current EU rules mean no clearance procedures, no customs duty is payable and no VAT is due to be paid or claimed when the goods are moved between EU countries. Thus payments of VAT are only due when the items are sold to the end customer when the business has the cash to pay for it.
The current position after Brexit is that VAT and customs duty would be payable before the goods can be released/cleared into the UK. The customs duty is likely to be irrecoverable, representing an additional cost to the business and the VAT might not be reclaimable for 3-4 months. Example, a business buys £10,000 of widgets from France a month, with a duty rate of 10% and they are on quarterly VAT returns. This will mean that a minimum of £6,600 of import VAT has been paid before it can be recovered on the quarterly VAT return and £3,000 customs duty has been paid which cannot be reclaimed.
So what are the potential solutions?
The government could help reduce the burden in several ways:
- Agree time to pay arrangements over a set period (effectively an interest free loan)
- Change the tax points of acquisitions (EU imports) so that VAT and duty isn’t payable until the next month
- Have special terms with the EU for VAT and Customs duty
However, at the end of 2016, the government was owed approximately £2.5b in VAT, so agreeing large interest free loans may not be attractive to them. By stalling tax points, they will open the door to fraudulent traders which could make the current VAT gap (£12.4bn) even larger. Will they be successful in negotiating favourable terms with their neighbours?
The Netherlands has a special regime which mitigates the VAT issues by treating the VAT like an acquisition, will the government explore this option?
The following are currently available to everyone and are recommended to pursue whilst seeing what happens with the above.
- Deferment account (effectively a VAT and customs duty tab with HMRC payable the middle of the following month).
- Consider alternative supply solutions, UK sourced goods won’t create the cashflow issues. If items are going to be imported, are there suppliers outside the EU which are cheaper and may also benefit from preferential treatment for customs duty?
To set up a deferment account, traders will have to apply for a customs guarantee, this process can take time. To fully understand the alternative suppliers and rules/actions surrounding preferential treatment based on origin can also take time.
Conclusion
The promising sign is that after a year we finally have a better understanding of the consequences and Nicky Morgan, chair of the Treasury Select Committee is banging the drum in trying to get these issues resolved.
The issues we will see from a UK perspective will be replicated when EU customers buy our goods (with the exception of the Netherlands), therefore given the amount of trade between the UK and EU in both directions it is in the interest of both parties to endeavour to reach a workable solution.