VAT in ‘no deal’ Britain

With just seven months to go, the prospect of a ‘no deal’ Brexit looks increasingly likely. Theresa May recently said that it ‘wouldn’t be the end of the world’ and the fact that HMRC have just released guidance on ‘VAT for businesses if there’s no Brexit deal’ indicates that it is more than a distant possibility, despite HMRC’s assertion that ‘a scenario in which the UK leaves the EU without agreement remains unlikely.’

For most voters, VAT was probably the last thing on their mind when they stepped into the voting booth two years ago for the Brexit vote. Immigration, sovereignty and industry were hot topics in political debates preceding the vote. VAT wasn’t really on anyone’s agenda.

However, Brexit will change a lot of things, including how the UK charges VAT on imports.

According to HMRC guidance, in the event of a ‘no deal’ scenario, the government says it will introduce ‘postponed accounting for import VAT’. This means that UK VAT-registered businesses who are importing goods to the UK will be able to account for import VAT on their return, rather than paying VAT directly at the border. This would reduce friction for imports at the border because they won’t be charged VAT on import, but later on.

Interestingly, in ‘no deal’ Britain, the government would introduce this VAT system on all imports, not only those from the 27 remaining EU nations. VAT will no longer be collected at the point that goods enter the UK’s VAT area. This means that a system known as postponed accounting would be introduced on all goods.

Why HMRC would choose to do this is a topic for debate. Perhaps the government feels constrained by WTO (World Trade Organisation) rules on differentiating between the EU27 states and the rest of the world. It could also be because HMRC may fear ‘gumming up’ the borders to an unacceptable degree. Worrying about scenes at Britain’s borders akin to a baggage handlers strike at Heathrow on ‘Brexit-Day’ would be a rational anxiety.

In the event of a no deal, the government would also abolish Low Value Consignment Relief for all imports. This means that parcels from businesses over a value of £135 and of non-zero rated goods, will be charged VAT. HMRC claim that they will implement a technology based solution to charge VAT, the details of which remain unclear, as does how HMRC are attempting to collect VAT from overseas countries.

The HMRC guidance is preliminary only and highly vague. How post-Brexit VAT will look is dependent on a whole range of factors, not least the nature of any deal eventually achieved between the UK and the EU.