Brexit Phase II; Over a Barrel?

As we move into Phase II of the Brexit negotiations, both sides are scrambling to avoid being seen as being “over a barrel”.

The phrase originated in the middle of the 20th century in the United States and is thought to allude to the situation of someone being draped over a barrel, either to empty their lungs after being close to drowning, or else to be flogged! In either case, the person over the barrel is in a position of helplessness, and is certainly under the control of another party.

Whilst there seems little doubt that extremists on both sides of the argument would love to give the other side a good flogging, it seems to me that the drowning man may be more apt. But the question must be who is saving whom?
Being a cynic, I’m already sure what the politicians will tell us, but what I’m concerned with is ordinary businesses within the EU, including the UK (we have not left yet!). The way things are going, there is no doubt some of them could be left over a barrel whilst the politicians laud their respective victories.

In the microcosm of Brexit that is VAT, we have many “simplifications” for cross border supplies of goods and services. Right now, we have no solutions offered for post Brexit. Thus, for example, a French company undertaking B2B construction work in the UK faces having to obtain a UK VAT ID, charge UK VAT, and submitting UK VAT returns, all of which can currently be avoided if the UK customer is established in the UK and has a UK VAT ID. Similarly, post-Brexit a UK company working on goods in Germany would be required to have a German VAT ID, will have to submit German VAT returns and obey German VAT rules (which as things stand are different to UK VAT rules!).

These are not isolated instances – in broad terms there are dozens of VAT simplifications for both supplies of goods and supplies of services. These need to be resolved, or at least some form of certainty given to businesses as to the position as at the end of March 2019, when the UK formally leaves the EU, and then again as at 31 December 2020 when the remaining member states have said they want the transitional phase to end. I will say at this stage that I find these timetables totally unrealistic.

And these are not the only tax issues. Just to give one example. The Construction Industry Scheme is a UK direct tax withholding arrangement whereby up to 30% of the value of a construction service must be withheld by the customer – there’s more to it, but that’s for another day. Right now, it applies to all contractors working in the UK, including those from other member states of the EU.

But, the scheme cannot discriminate against businesses from other EU member states operating in the UK, and thus to get a status whereby the business in another member state can be paid in full (“gross payment status”), the UK tax authority must look at the “home” compliance record of the contractor. If the French contractor has a good record in France, then it is possible to be paid in full.

As things stand, there are no proposals to carry this arrangement forward either within the transitional phase or after 31 December 2020. This will apply equally to existing contracts and to new ones. So, in theory a business on a major UK construction project such as HS2 may suddenly find itself with not only a UK VAT registration it does not want, but also with major cash flow and administrative issues arising from the Construction Industry Scheme.
And are we really to face three different sets of criteria over a period of 21 months? The current system to 29 March 2019, the transitional system to 31 December 2020 and the fresh solution from 1 January 2021? That in terms of both tax administrations and business is absolutely crazy – I have no doubt that the tax administrations do not have the resources to manage this. Surely the politicians must grasp this nettle very early in 2018. But do they have the desire?

In the meantime, we have had a couple of pieces of interesting news in the last week or so about borders. Firstly, we understand that the French government wants the UK Government to contribute to the French costs of Brexit. Secondly, a suggestion has been made in the UK that the UK Border Force be reinforced by volunteers who would have no power of arrest or search.

Both ideas are equally crazy – for years the UK faced General De Gaulle saying “Non” as it tried to gain access to the Common Market. It would appear likely that M Macron will hear only a firm “No” to the suggestion. He must know that acceding to such a request is just not politically possible for the UK Government – so this can only be calculated mischief, something that needs to be cut out by both sides.
In the meantime, a volunteer Border Force in the UK is about as sensible a suggestion, albeit one which will receive support from an awful lot of zealots with romantic views of smugglers with barrels of brandy slung over their shoulder landing in some isolated cove in Cornwall. If those romantics check out their history they will find that then, much as now with organised cross border crime, the smugglers were not jolly chappies but armed and happy to kill or maim. Guarding borders is not a game for plucky amateurs.
My great Brexit wish for 2018 is a large dose of pragmatism amongst the negotiators and politicians (I am not stupid enough to ask for that from the British press). Without this, businesses from the UK and the rest of the EU will face incredible difficulties doing business cross border as Brexit progresses. Costs will increase. Red tape will increase. And I fear that businesses may even fail as a result.

Happy New Year!