Treasury Committee to consider Brexit 'opportunities and challenges' for VAT

"Brexit may provide both opportunities and challenges to the UK’s approach to VAT," said Nicky Morgan MP, chair of the Treasury Committee. "We’ll examine the chief concerns for HMRC and businesses going forward, and what impact Brexit will have on HMRC’s efforts to reduce the VAT element of the tax gap."

Nicky Morgan said in January that the committee would investigate Brexit proposals in the Taxation (Cross-Border Trade) Bill which would mean UK retailers and manufacturers would have to pay VAT upfront on post Brexit imports of goods from EU member states.

Under the bill imports of goods from the EU will be treated in the same way as imports from other countries after Brexit, which means that import VAT will have to be paid at the border. The VAT can be reclaimed if the importer is going to be using the goods to make VATable supplies but there is a cashflow disadvantage as the VAT will only be recovered or offset in the importer's next VAT return. Returns will usually be made quarterly, although businesses with large VAT liabilities are obliged to make monthly payments on account.

In contrast, at present there is no need to pay import VAT when goods from the EU arrive in the UK. The import VAT will be offset against output VAT in the importer's next VAT return meaning no cash outflow to HMRC if the importer is using the goods to make taxable supplies.

At the second reading of the bill in the House of Commons, Treasury minister Mel Stride said: "We do not want over 100,000 businesses to be disadvantaged in cash terms…so this is certainly something that we will be looking at closely."

"The government has said it will do something to address the cashflow hit for importers of goods from the EU. This enquiry should highlight the issue further and make sure it stays on the government's agenda," said Steven Porter, a tax expert at Pinsent Masons, the law firm behind Out-law.com.

"The enquiry is also a great opportunity for businesses to raise any other concerns they have about the way VAT will operate after the UK leaves the EU, or more general gripes about the VAT system," he said.

The committee is asking for views on the aspects of VAT that cause the biggest problems for business and how they might be improved and how VAT related disagreements between businesses and HM Revenue & Customs (HMRC) can be resolved quickly and fairly. It will also consider how VAT measures up against the principles of good tax policy, and how the process of making VAT policy could be improved.

The enquiry is also planning to look at the root cause of the 'VAT gap'. The 'VAT gap' is the difference between the amount of VAT that HMRC expects to receive in the UK and the VAT HMRC actually receives.

"HMRC collected around £124 billion in VAT last year—over a fifth of the UK’s total tax take—and failed to collect around £12.6bn in VAT. The reasons for why VAT is so vulnerable are somewhat opaque, so the Committee will examine how this might be addressed," Nicky Morgan said.

"HMRC is already taking measures to reduce the VAT gap. For example, a raft of new measures have been introduced to clamp down on VAT avoidance by overseas retailers using online platforms. It's going to be much harder for businesses which are avoiding paying VAT on sales to UK consumers to continue trading in the UK," Porter said.

If sellers based in the UK or overseas are not paying the correct VAT when selling in the UK via an online marketplace, HMRC can make the marketplace remove the seller or be liable itself for any future unpaid VAT. From this month, online marketplaces can also liable for VAT where they knew or should have known that an overseas online seller should have been VAT-registered, but was not.

The committee is asking for written submissions by 31 May in answer to the specific questions it has raised.

It was also announced that the Treasury sub-committee is going to investigate whether HMRC deals with all tax disputes fairly and in an even-handed manner and a separate enquiry will examine the progress made in reducing the amount of tax lost to avoidance and offshore evasion.