Brexit: upfront VAT on imports from EU to be investigated by MPs

The proposals are set out in the Taxation (Cross-Border Trade) Bill, which had its second reading in the House of Commons yesterday. The British Retail Consortium has raised concerns about the cashflow implications of the proposals.

"After Brexit imports of goods from EU member states will be treated in the same way as imports from other countries. Import VAT and any customs duties will be due at the time of the import. The import VAT should be recoverable from HMRC by retailers and manufacturers who will be making vatable supplies, but there will be a cashflow disadvantage as the business will have to pay the VAT when the goods are imported but will not be able to recover it until their next VAT return," said Steven Porter, a tax expert at Pinsent Masons, the law firm behind Out-Law.com.

Where goods are currently imported from another EU member state the business importing the goods accounts for 'acquisition tax' in its next VAT return. If it is going to be using the goods to make taxable supplies, perhaps by selling them to UK customers, or incorporating parts into a product to be sold to UK customers, it will reclaim the input tax in the same return and so will not have to make a VAT payment in respect of the acquisition, said Porter.

"After Brexit if imports from the EU are treated in exactly the same way as imports from countries outside the EU, there will be cashflow disadvantages for retailers and manufacturers, which could flow through into increased prices for UK consumers," Porter said.

Under the current system for importing goods from outside the UK, the import VAT has to be paid at the time that the goods pass through the port or airport. Arrangements can be entered into to defer the payment so that it is not paid immediately on import but is paid monthly by direct debit. However, obligations to HMRC must be secured by a guarantee from a bank, building society or insurance company.

In a briefing to MPs the British Retail Consortium said that the cost of importing goods from the EU would increase

"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," the British Retail Consortium said.

It said that costs would also increase if businesses had to take out bank or insurance backed guarantees in order to enter into deferment arrangements.

The Bill had its second reading in the UK parliament yesterday, where Treasury minister Mel Stride was pressed on the issue. He said that the Bill itself does not decide whether the VAT position will change, but it does allow for that possibility. The eventual position will depend on the outcome of the government and EU's Brexit negotiations, he said .

"[Nicky Morgan] is absolutely right to raise this issue, with which the government and the Treasury have sympathy," he said in parliament. "We do not want over 100,000 businesses to be disadvantaged in cash terms in the way she describes, so this is certainly something that we will be looking at closely going forward. The Bill itself does not prescribe any particular ​endpoint in this context. It will be for the government, after the passage of the Bill, to decide exactly where we wish to end up."

In the Budget statement last November, the government acknowledged that businesses currently benefit from postponed accounting for VAT when importing goods from the EU.

"The government recognises the importance of such arrangements to business due to the cash flow advantage they provide. The government will take this into account when considering potential changes following EU exit and will look at options to mitigate any cash flow impacts" it said in the Budget.