An amendment to the Brexit customs paper, passed by a narrow majority in Parliament on Monday, which will see the UK exit the EU VAT regime is also likely to increase costs for UK consumers buying goods directly from EU businesses, RSM is warning
The amendment, won by 3 votes (303 vs 300), was one of four put forward by the hard Brexit European Research Group (ERG) within the Conservative party. It means that the UK will not attempt to collect EU VAT on behalf of other EU states, nor will it participate in cross border trade VAT simplifications. In addition the UK will no longer be subject to European Court of Justice rulings on indirect tax.
Under current EU rules, businesses based in other member states do not need to charge VAT if the value and cost of delivery of their goods sold to consumers in the UK fall below a ‘distance selling threshold’ of £70,000.
This EU-wide simplification will be removed when the EU adopts the ‘definitive VAT regime’ whereby such businesses will apply the VAT applicable in the member state where its customer resides.
David Wilson, technical associate director at RSM, said: ‘This crucial point seems to have been lost in all the concerns surrounding the difficulties the UK will face in negotiations with the EU regarding amendments passed relating to the Northern Ireland “backstop”, and preventing the UK collecting tariffs on behalf of the EU without reciprocity among member states.
‘By agreeing the ERG’s amendment on removing VAT alignment, EU businesses selling goods to UK consumers would have to charge the rate of VAT applicable in their own member state.’
Wilson points out that 17 member states have a VAT rate higher than the UK’s, and only five (Luxembourg, Germany, Malta, Cyprus and Romania) have a rate of VAT lower than that of the UK.
As a result of the amendment being passed, UK consumers buying goods directly from Ireland will, for example, see the effective VAT rate increase of 3% (the current VAT rate in Ireland being 23%); UK consumers buying goods directly from Sweden, Denmark or Croatia will face a 5% effective VAT rate increase; and UK consumers buying goods directly from Hungary will face an effective 7% VAT hike.
RSM says non-alignment of EU VAT rules will also have ramifications for UK businesses trading with EU suppliers. Without such alignment and the agreement of a common VAT area, UK businesses will have to account for import VAT (and potentially duty) on all goods bought from their EU suppliers. In the absence of access to a VAT/Customs ‘union’ there could be an undue burden on cash/cash-flow, which could ultimately find its way down to the consumer.
Wilson said: ‘It is welcome that the VAT implications of Brexit are now coming into focus; it can however be seen that, even at a very high level, the ramifications will have an impact on UK consumers, business, and indeed on future negotiations with the EU.’
Report by Pat Sweet
