The government has come under pressure to reveal the impact on more than 130,000 UK firms of rules due to take effect after Brexit that will force them to pay VAT upfront for the first time on all goods imported from the European Union.
Nicky Morgan, the Tory chair of the influential Treasury select committee, has demanded to know what contingency plans were being made to avoid the extra cost of the rule change hitting UK firms.
Morgan said in a letter to the head of HMRC, Jon Thompson, that he must respond to warnings by the British Retail Consortium that firms face paying VAT upfront when they import goods, causing them huge cashflow problems. The BRC also fears that “the processing time at ports and border entry points attached to the customs process could increase”.
Staying in the single market and customs union
The UK could sign up to all the EU’s rules and regulations, staying in the single market – which provides free movement of goods, services and people – and the customs union, in which EU members agree tariffs on external states. Freedom of movement would continue and the UK would keep paying into the Brussels pot. We would continue to have unfettered access to EU trade, but the pledge to “take back control” of laws, borders and money would not have been fulfilled. This is an unlikely outcome and one that may be possible only by reversing the Brexit decision, after a second referendum or election.
The Norway model
Britain could follow Norway, which is in the single market, is subject to freedom of movement rules and pays a fee to Brussels – but is outside the customs union. That combination would tie Britain to EU regulations but allow it to sign trade deals of its own. A “Norway-minus” deal is more likely. That would see the UK leave the single market and customs union and end free movement of people. But Britain would align its rules and regulations with Brussels, hoping this would allow a greater degree of market access. The UK would still be subject to EU rules.
The Canada deal
A comprehensive trade deal like the one handed to Canada would help British traders, as it would lower or eliminate tariffs. But there would be little on offer for the UK services industry. It is a bad outcome for financial services. Such a deal would leave Britain free to diverge from EU rules and regulations but that in turn would lead to border checks and the rise of other “non-tariff barriers” to trade. It would leave Britain free to forge new trade deals with other nations. Many in Brussels see this as a likely outcome, based on Theresa May’s direction so far.
No deal
Britain leaves with no trade deal, meaning that all trade is governed by World Trade Organization rules. Tariffs would be high, queues at the border long and the Irish border issue severe. In the short term, British aircraft might be unable to fly to some European destinations. The UK would quickly need to establish bilateral agreements to deal with the consequences, but the country would be free to take whatever future direction it wishes. It may need to deregulate to attract international business – a very different future and a lot of disruption.
Morgan said: “As the reality of Brexit begins to bite, its implications on tax are yet to be fully explored.
“Under the taxation (cross-border trade) bill, firms would have to pay VAT upfront on goods imported from the EU before they can be released into free circulation in the UK.
“I have written to HMRC to seek clarification on the costs to businesses and consumers arising from this legislation, the options being considered to mitigate these costs, and the likelihood of the UK participating in the EU VAT area as part of its end-state relationship with the EU.”
Morgan pulled back from earlier comments that she would launch an urgent investigation of the matter, saying that she preferred to wait for Thompson’s response to her letter.
Many Labour and Tory MPs and peers believe the only way to avoid the VAT Brexit penalty would be to stay in the customs union or negotiate to remain in the EU-VAT area.
The chancellor, Philip Hammond, admitted last year that firms faced delays and extra costs on imported goods, and in last year’s autumn budget he committed to “look at options to mitigate any cash-flow impacts”.
HMRC has said that a new system allowing firms to delay VAT payments on imports could be designed, but it would need extra funding from the Treasury.
