The aggressive attitude of the tax authortities has created new and complex potential risks both for UK companies trading into the EU and the accounting practices advising them.

Much has changed over the past year, not least the triggering of Article 50 by Theresa May, following the UK’s decision to leave the European Union.

What has not changed since last year is the appetite of tax authorities to maximise their VAT revenues. Though the Eurozone is finally showing some signs of economic life, tax authorities across the continent are still, according to Professor Rita De la Feria, academic VAT expert and severe critic of responsibilisation, ‘addicted and desperate for revenue’.

In this environment, VAT has become ever more significant as an income stream for governments.

The problem for tax authorities in an era of globalisation and digitalisation is the highly mobile nature of people and capital, which makes the collection of income and corporate taxes ever more difficult.

Low hanging fruit

This leaves VAT, a geographically specific transaction tax with definable places of supply and trails of supporting invoices, as the closest thing many authorities have, from the perspective of revenue collection, to low hanging fruit.

The tax authorities are supported in this process of moving towards a greater focus on indirect tax by several prominent bodies such as the IMF, OECD and the EC. These three bodies have all advocated shifts away from direct tax to indirect tax instead, with their view being definitively expressed as long ago as 2013 when the OECD’s Economic Policy Reforms report stated that: 'A number of international studies have indicated that value-added taxes (VAT) have the least impact on growth, while corporate income taxes have a negative impact on growth.'

Nevertheless, collecting VAT is not without its challenges. As we said in last year’s article, the primary driver of VAT ‘responsibilisation’ is the perception of gigantic VAT fraud taking place across the EU (the current ‘VAT gap’ in the EU is around €170bn (£145bn) annually).

In reality though, there are serious questions about how much VAT actually goes missing as a result of genuine error and compliance failure rather than criminal activity; but the authorities have, according De la Feria, elided the distinction in order to justify the responsibilisation process.              

Until last year, the process of responsibilisation was more advanced in mainland EU than in the UK.  For example, Germany had asked warehouse keepers for details of its clients’ tax positions. We also understood that the Dutch tax authority had attempted to sue a warehouse owner for the non-payment of VAT by an unrelated company keeping stock on its premises. We have even heard of accounting firms in the EU being pursued about their clients’ failure to comply with VAT regulations.

Since then the UK has to some extent caught up: following the intense controversy about non-payment of VAT by Amazon and eBay marketplace sellers based outside the EU (mainly in China), legislation has been passed that makes operators of online marketplaces liable (in the last resort) for the VAT left unpaid by their clients.

This measure was included in George Osborne’s final budget; given the more explicit ‘fairness’ agenda of the May government, we can expect to see an intensification of interest in VAT collection in the UK.

This is already starting to happen with HMRC currently consulting on the possibility of a ‘split payment’ model whereby tax collection on marketplace sales may shift to a more direct method, possible involving payment service providers, banks and card scheme operators.

But it is Brexit, in this as so much else, that really changes the calculations for UK accountants advising businesses trading into the EU.

In 2010 the EU put in place the Mutual Assistance Recovery Directive, to facilitate cooperation between member state tax authorities in the recovery of debts. The take up of the Mutual Assistance Recovery Directive and associated mechanisms has been rapidly increasing.

Practical outcome

What this means in practice is that if a client is getting its VAT wrong in, say, Germany, it can probably expect to be audited elsewhere too as the German tax authority shares its information with its peers in Europe. And if your client has an unpaid debt in Germany (which can be imposed even if the client is not registered there) which it does not pay, it can expect to be contacted by HMRC for payment.

When the UK leaves the EU, it will almost certaintly leave the Mutual Assistance Recovery Directive (based on the most recent views of what a post Brexit UK will look like). This means that EU tax authorities have a limited window to pursue non-compliant UK businesses through the most efficient possible means.

We already are seeing what appears to be an increase in the auditing of UK businesses trading into the EU: accountants should be prepared for their clients to be scrutinised. Of course, after Brexit, UK businesses  will become a target in a different way. Supply chain compliance will be a priority if responsibilisation is to be avoided. 

Brexit will also have a direct impact on the VAT status of a growing segment of many accountancy practice clients: e-commerce ‘distance sellers’. After Brexit, these sales when made from the UK to the EU will become exports.

Amazon will probably handle the transition for their marketplace sellers well; but for more complex retailers, it will be vital to manage the new arrangements, or risk customs complications and a serious slowdown in delivery times.

Individual EU Member States are also introducing their own rigorous tech based anti-VAT fraud measures (comparable to elements of HMRC’s ‘Making Tax Digital’ project). SAF/T and Immediate Supply of Information reporting requirements are currently being rolled out in several countries. These will see tax authorities be able to perform simple compliance assesments on anything up to a daily basis.

Sadly, we can expect UK businesses to be a major focus of interest for the EU pre and post Brexit. Accountants and advisors should take care to limit risks to clients and to themselves.  

About the author

Nicholas Hallam is chief executive of VAT consultancy Accordance