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Answers Asked Of UK Tax Agency On Brexit VAT Changes

by Jason Gorringe,, London

11 January 2018

Nicky Morgan, the Chair of the UK's Treasury Committee, has written to Jon Thompson, the Chief Executive of the UK tax agency, to seek answers about how necessary value-added tax (VAT) policy changes will impact businesses and about support measures.

In a January 9 letter, she wrote: "The Taxation (Cross-border Trade) Bill, which had its Second Reading yesterday, makes major amendments to the VAT Act, with the intention of ensuring that the VAT regime functions effectively after the UK leaves the EU. The principal implication of these changes is that, after Brexit, imports to the UK from the EU would become liable for import VAT, which would have to be paid before goods could to be released into free circulation in the UK. The changes would potentially affect over 200,000 businesses. For 132,000, the changes would be novel because these businesses trade only with other EU member states."

"The Government has already acknowledged that the application of import VAT to EU imports would constitute an additional burden, and the Autumn Budget committed to 'look at options to mitigate any cash-flow impacts," she pointed out.

She has asked HMRC to inform the Committee of the estimated cost the changes to businesses; a description of any measures under consideration to mitigate these costs, and whether such would also apply to non-EU transactions, since failure to do so may contravene WTO rules. She also asked whether a definitive decision has been taken that rules the UK out of participating in the EU VAT area; when HMRC intends to notify firms of how they will be impacted by the changes; and to assess the consequences of the necessary changes to VAT policy with regards to UK exports to the EU and the risks of potential behavioral responses by taxpayers.

In addition, she noted that the European Commission announced in October 2017 that it is working on proposals to reform the EU VAT area by 2022. She said: "This too will have an impact on cross-border trade, and the accounting and payment of VAT. I would be grateful for your assessment of these proposals, and how their implementation and effects interact with the changes to the VAT regime necessitated by Brexit."

Noting the content of Morgan's letter, the Federation of Small Business urged the Government to see the UK's departure from the UK as an opportunity to reduce the value-added tax burden on businesses. Its chairperson, Mike Cherry, said: "Brexit should be seen as an opportunity to reduce, not increase, the huge administrative burden that the VAT regime places on small firms. Our members say VAT is the most time-consuming tax to manage, with registered small firms spending more than a working week a year complying with their VAT obligations on average."

"If we move to an environment where small firms are forced to stump up for VAT on products bought from the EU before having the chance to recover those costs through their own sales, that could create real cash flow issues and add further complexity to the system. Small firms are already having GBP18bn (USD24.3bn) withheld from them due to the late-payment crisis."

"Of course, the decision to leave the European Union does not necessitate change for the worse. As the Office for Tax Simplification rightly points out, the fact that VAT rules are largely prescribed by the EU means leaving the Union could mark a chance to make the tax easier to navigate."

"Maintaining frictionless trade with the EU needs to be the top priority for Brexit negotiators. Nine in ten small firms that do business internationally have ties to Europe. Agreeing a time-limited transition period for the years after the UK's withdrawal from the EU is absolutely vital to providing these businesses with some stability."

"We look forward to working with the Chancellor on the VAT consultation announced at the Autumn Budget to help reform a tax which currently places huge administrative burdens on small businesses."

TAGS: environment | compliance | VAT tax authority guidance | tax | small business | business | European Commission | VAT legislation | VAT cross-border transactions | accounting | United Kingdom | tax authority | legislation | trade | European Union (EU) | VAT compliance matters | Europe | Tax

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