Customs Union implications

This month’s vote in the House of Lords on an amendment to keep the UK in the Customs Union has challenged the government’s Brexit proposals.

While Theresa May is adamant a withdrawal of the Customs Union remains on track, the Lords’ verdict has raised the temperature of the debate, creating pressure for a potential U- turn. This may be a welcome development for UK businesses that bring in goods or services from the Continent.

While much detail around Brexit is still unclear, we know the government’s proposed departure from the Single Market and Customs Union at the end of 2020 will mean changes in how VAT is accounted for. For UK businesses which currently rely on EU suppliers, these changes present a threat to their financial stability.

As an EU member, VAT on goods purchased from other EU businesses is accounted for under the ‘ reverse charge’ procedure. No VAT is charged by the supplier while the buyer accounts for the tax which is then recovered on the same VAT return. As a result, most UK businesses currently have no VAT ( or Duty) cost when making purchases from other EUbased suppliers. As things stand, when Britain withdraws from the Single Market and Customs Union in 2021, British business will be subjected to pay import VAT ( as well as customs duty) upfront on goods they purchase from the EU.

While most companies will be able to recover the VAT element, refunds could take three months, impacting cash flow and working capital. This brings other implications, including increased bank guarantee charges for businesses operating import VAT/ duty deferment accounts.

The intervention by the Lords therefore deserves serious consideration – can the UK Government withdraw from the Customs Union and, at the same time, protect Britain’s economic interests? While remaining in the Customs Union will not remove the VAT cash flow problem, it will mean UK business will have to pay duties on imports from and exports to the EU which will be financially detrimental.

As the debate on this issue goes on, any business buying goods from EU suppliers should prepare for the post 2020 VAT changes. There are relief measures including inward processing relief, duty deferment and customs warehousing which could be considered as a means of reducing the impact. Another advisable action is to apply to HMRC for Authorised Economic Operator ( AEO) status. This internationally recognised accreditation indicates the business’ role in the supply chain is secure, and customs controls and procedures are compliant.

Businesses, while unlikely to influence a government U- turn on plans to leave the Customs Union, should prepare for the burden this would impose on their finances. ● Iain Masterton, VAT Director at accountants at Chiene + Tait