Richard North, 05/10/2018  

Now that the conference season is over, the Lib-Dems no longer need their 'phone box, Birmingham can go back to being the boring city it always was and the Labour luvvies can clean up their nosebleeds and forget that they ever came as far north as Liverpool.

So, while the politicos return to their Westminster comfort zone for another year, the real world, real people will have to carry on without their inspiration and guidance. How can they possibly manage?

Some MPs, however seem to be trying to make a difference, witness Meg Hillier, chair of the Committee of Public Accounts. She has written to Jon Thompson, Chief Executive of HMRC, raising one or two awkward questions.

In particular, she and her committee express concerns about the 100,000 small traders that HMRC cannot engage directly with, as they don't know who they are. Hillier wants Thompson to update her on the level of business understanding and preparedness for changes to rules and procedures in the event of "no deal".

Also, Hillier refers to evidence from Thompson on the possible cash-flow disadvantages to businesses because VAT on goods imported from the EU would be due earlier. This was supposed to have been dealt with by a system known as "postponed accounting", something which the government proudly announced in its Brexit "technical notice", published on 23 August.

But it now transpires that there could be problems making available the necessary resources to develop the software to make the system work. HMRC is fully committed to bringing in the Customs Declaration System (CDS) and only now it is looking at the software implications of delayed accounting. Thus, the committee is not at all optimistic that the necessary systems will be in place in time for Brexit.

Oddly enough, on 1 October, we saw a reference to the British Chamber of Commerce and its Brexit Risk Register, where import VAT was the only one of 24 issues to get a green light.

Even then, BCC director-general Adam Marshall was saying: "I've never seen a higher level of frustration among businesses", adding that, "a real gap is opening up between business and politics". And now resolution of that single VAT issue is by no means certain.

But actually, import VAT is only one small part of the overall system relating to the import and export of goods. For those businesses exporting goods to EU member states, there will be very significant changes which will have a massive effect on whether we achieve "frictionless" trade.

Currently, with the UK still a member of the EU, VAT registered businesses in the UK selling to registered businesses in the EU are allowed to treat exports as "dispatches" or "removals" rather than exports. This means that VAT is not charged.

Crucially, though, there is no additional paperwork burden. VAT returns are submitted in the usual way and normal commercial records must be kept, which must be available to the HMRC for a period of six years. Firms exporting more than £250,000-worth of goods must also complete Intrastat returns.

As for EU importers, registered firms are usually allowed to pay VAT in their normal accounting period, which they can claim against VAT charged when they sell the goods – thus preserving cash flow (the very problem our importers are looking to solve).

Once we leave the EU, though, things change – as you might expect. As the Commission's Notice to Stakeholders (published on 11 September) point out, the EU's VAT rules will no longer apply. The UK will, therefore, be obliged to treat exports of goods to EU Member States in the same way that goods to non-EU states are handled.

This means that goods intended for export (by a VAT-registered company) are treated as zero rated. That is a fairly straightforward process so there should be not great problems.

However, where there is a difference is that strict rules will apply to exporters, requiring them to obtain documentary evidence to prove that their goods have left the country, including an official departure message from HM Customs. This official message is in addition to the customs declaration.

Currently, there are no provisions for these messages to be generated for the bulk of the goods going through the Channel ports, and the chances are that there will be no system ready on 29 March next year.

In the absence of a system, exporters might find it very difficult supporting their zero rate declarations and may find themselves having to pay VAT on goods exported, which will not be recoverable. If, on the other hand, the UK government relaxes the system, it lays it wide open to VAT fraud, the costs of which have been known to run to billions of pounds.

The problems, of course, don't stop there. VAT is then payable immediately on entry of those goods to an EU Member State. Furthermore, the taxable amount is based on the customs valuation which is then increased by taxes, duties, levies and other charges due, plus incidental expenses such as commission, packing, transport and insurance costs.

All this adds considerable costs and complications for the EU importers, but it also means that goods will have to be processed at the borders, with payments made before goods can be released.

As for the EU, goods exported to the UK from EU Member State territories will have to undergo mirror-image procedures, when it comes to proof of export, requiring the EU Member State ports to gear up in time to provide the necessary documentation.

But all this applies to business transactions. Individuals personally taking goods outside the EU which they have purchased in the UK, on which they have paid VAT, are entitled to refunds under the current system. If this system continues, then there will be a huge administrative and control burden at ports and airports to administer the refund system.

It is this, primarily, that turns the Swiss frontier into hard borders with EU Member States, as Swiss citizens cross the borders to do their shopping and then reclaim VAT before returning home. VAT fraud is epidemic, requiring a high level of surveillance and border-checks in order to stem multi-billion losses.

This could prove a particular problem for the Irish border, especially if the system retains a de minimis provision, where imports below a certain value are VAT free. One can expect a considerable flow of traffic exploiting the VAT system, taking advantage of refunds.

Then, of course, there are services to take into account, including digital services, and also direct cross-border sales from UK businesses to EU-based private customers – and vice versa. These have their own complications and will require special arrangements, the nature of which have yet to be decided.

Bearing in mind the complexity, the ubiquity of the system and the general lack of preparedness, VAT has the makings of the elephant in the room for Brexit – a huge problem which entirely on its own has the capacity to bring cross-border trade to a grinding halt.

Yet, hardly any references to the issue are made in the legacy media and, as always, the politicians are largely silent. And even if we plump for a free trade agreement and manage to keep a transition period going, VAT arrangements will be a complex affair to negotiate, requiring substantial reciprocal agreements.

And whatever transpires, the post-Brexit system will undoubtedly be more complex than it is now, adding unavoidable friction to the trading system. It will be all the more complex for being neglected, even to the extent of breaking the system.

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