Brexit – tax on consumption – principle must be protected

Here’s an interesting article from one of our colleagues, Alan Powell, a specialist excise duties consultant. We refer all of our excise work to him.

At the very moment Britain prepared to vote for Brexit, the EU court (CJEU) was giving a massive boost to the beleaguered UK alcohol excise industries by confirming a simple but massively significant principle – excise duty is a tax on consumption. This might seem obvious and trite but HMRC has always refuted this principle because of its beneficial consequences to the industry and taxpayers.

Alan Powell, specialist excise duties consultant, said: “The plain legal facts are now clearly spelled out and must be protected post Brexit. In summary:
Excise goods must be produced in a tax warehouse and there must be a system to suspend the duty (i.e. a relay system of tax warehouses);
Since excise duty is a tax on consumption, it is necessary that the duty is suspended as near to the real consumer as possible;
If goods do not physically leave tax warehouse/duty suspension, there is no availability for consumption and no duty liability, even for technical irregularities.
Powell explains: “The UK has failed to apply these principles in most cases and, in terms of duty charged for “technical irregularities” has been unlawfully plundering alcohol businesses for many years. HMRC must immediately recognize and implement EU law correctly.

Powell goes on “The best principles of EU law for excise duty in UK law must be confirmed during the Great Repeal Act, especially that excise duty is a tax on consumption. But Powell warns “If industry does not press its case, there is a risk – as evidenced by HMRC’s latest attacks on the alcohol sector – that HMRC will look to drive the duty point further back for alcohol products as they have for oil and tobacco and become, in effect, an “early” tax and burden on business.”

Background – excise as a consumption tax

Under EU law, excise duty is liable on eg alcohol following production within, or importation into, the EU but the duty is suspended by holding the goods in a tax warehouse (production premises (eg brewery, cider makers etc) or general “bond”). The duty is not due until the goods are released for consumption and physically depart the tax warehouse.

HMRC has always argued that “consumption” doesn’t mean consumption by a consumer but this is not true and proven to be the case last year (2016) at the CJEU.

The CJEU case C‑355/14 Polihim-SS’ EOOD (“Polohim”) of 2 June 2016 has now ruled incontrovertibly that excise duty is a tax on consumption (per recital 9 to Directive 2008/118/EC as also found in the BP Europa SE case (also 2016)).

In looking at what a tax on consumption means, Polohim also builds on foundations set out in previous case law that identifies that whilst excise goods have a liability to duty following production or importation, there is a structure of duty-suspension (ie tax warehouses) that enable the duty liability to be suspended and that the duty, as a tax on consumption, should be suspended as near as possible to the (final) consumer.

Moreover, Polohim determines that “so long as the goods in question remain in the tax warehouse of an authorised warehousekeeper, there can be no consumption, even if those goods have been sold by that authorised warehousekeeper”.

UK law and HMRC policy imposes arbitrary duty points and restrictions on duty suspension in clear breach of EU law and denial of fundamental rights.

Post Brexit

It is vital that the best principles of EU law are not only carried over in the Great Repeal Act but confirmed clearly in UK law. The risk of not being vigilant is that HMRC unpicks good law and legislates domestically to deny that excise is a tax on consumption and to withdraw alcohol duty suspension which they cannot do under existing fundamental EU law. Nevertheless, there are indications this is being mooted at high level. HMRC’s end game may be to roll back alcohol duty suspension when they already have severe and punitive powers (latest being AWRS).

HMRC actions – Business under attack – burdens and lack of proportionality

The gross alcohol tax gap figure is said to be £1.8 billion and there has been significant duty fraud in popular UK beer brands and some wine products. The fraud figure is disputed by some in the trade but illicit diversion – mainly smuggling – has been a problem in supply chains made worse by the failure of the electronic movement and control system (EMCS) to fight the fraud as was its express intention. Paradoxically, EMCS has inadvertently made the fraud worse.

Due to the failure of EMCS and inability of revenue authorities to effectively combat the fraud, HMRC has instead been requiring business to undertake ever more onerous auxiliary duties, including risk assessment and due diligence of supply chains which are already highly regulated and many businesses are now complaining of “compliance fatigue”. Worse, HMRC is now requiring businesses to “police the supply chains” or risk revocation of approval if not. This is a consequence of how HMRC is applying the due diligence condition imposed upon business. The legal test for due diligence is simply to assess the risk and take (appropriate) mitigating action but HMRC is instead requiring a “blunderbuss” approach to be taken by business, which misses the point of due diligence entirely.

Furthermore, HMRC has been taking disproportionate action against any minor breaches of the rules. it is becoming evident that HMRC has either lost sight of its need to guard against acting disproportionately or doesn’t care. Either way, the consequences for business are perilous. This led to the most senior Tribunal Judge, Mr Colin Bishop censuring HMRC in such a case (United Wholesale) earlier this year. Mr Bishop’s decision records his mounting astonishment at HMRC’s failure to act proportionately and his displeasure at HMRC’s reviewing officer acting in a way that was blinkered and unfair. But HMRC has not heeded the lesson and is continuing its actions in this vein, which in turn is putting business, jobs and revenue at grave risk for no benefit whatsoever.

Contact Alan at alanexcise1@gmail.com

Brexit – concerned and bemused of Coventry

Recently we have seen a stronger than ever hint that there may be a two year (possibly three) transitional period from March 2019. Sadly, there was little flesh behind this, but the inclination is to believe that the UK will continue to benefit from regimes similar to the Single Market and the Customs Union.

I’ve mentioned transitional phases before, and the most famous one is in respect of completing the Single Market – in brief it was never completed and the five-year transitional phase became the current position. You might say it is a nice ploy to get politicians out of difficulty, not quite as effective as dropping something of the back burner, or kicking it into the long grass, but still effective.
But I am still left bemused and concerned.

My bemusement is simple – I do not understand international diplomacy, and certainly not the diplomacy between the UK and the EU. Access to the Single Market and the Customs Union is one such aspect. During the exchange of entrenched opinions in the weeks preceding 23 June 2016 (the date of the “in/out” referendum in the UK) various comments were bandied about regarding the divorce settlement that the UK would have to pay to leave the EU. Those convinced about leaving were adamant that it would be €nothing, whereas the remainers often quoted €50,000,000,000. From my position as a UK citizen (well, an EU citizen as well), it seemed to me that the UK had entered into an agreement meaning that it would have to pay a divorce settlement. I had no idea how much it would be, but must admit to accepting the €50,000,000,000 number seemed to have more credence than €nothing.

Roll forward 13 months, and now that debate amongst the protagonists has changed, as indeed have the protagonists. The UK Foreign Secretary says that the EU can whistle for the divorce settlement, and the French finance minister now wants €100,000,000,000. Clearly, we now face a cantankerous divorce, and in the real world we all know how awful that the type of divorce tends to be, and that it gets dragged out for far too long, with the lawyers being the only people making any real money out of it. And I’d say that is where we are with the two to three-year transitional period now becoming more tangible daily.

But, joining clubs like the Single Market and the Customs Union means payment of an entry fee. So, is the current position that the UK needs to pay a divorce settlement, but then pays again to maintain access to the Single Market and the Customs Union. It seems to me like having to pay twice. And that is why I think that the divorce settlement cannot be made before trade talks begin. The two are inseparable. It is not right to have to pay to leave a club and then pay again to come back in, certainly when membership has benefits to both sides.
And that is also why I am concerned, or at least partly so. If the divorce is cantankerous it may become increasingly cantankerous on trade between the UK and the EU, may well drive more and more businesses away from the UK, and leave all EU (i.e. including the UK) businesses in the dark until too late in the day.

As for the UK VAT perspective, we also have the prospect of the Brexit impact to contend with by the end of March 2019, whilst at the same time businesses are being expected to complete the preparation for “Making Tax Digital”, which really ought to be called real time tax reporting, something that cannot be completed until we know the changes required from the Brexit impact. In the meantime, other changes intended for the same date are to be completed – those involving fulfilment houses, where massive VAT rule changes will be seen (to prevent avoidance), but where many in the sector are also heavily involved with the Brexit impact. In this aspect of Brexit, the only winners will be tax consultants, accountants, lawyers, software houses and IT consultants.

Forgive the analogy, but right now it does feel like UK businesses are to be sent over the top in the front line, by a leader standing safely behind the lines, with no instructions except to keep marching straight on. Perhaps that is why so many are deserting the UK already.

It is time for tangible information to be given to businesses trading between the UK and the EU so that they can start to plan their business strategy. Instead we remain reliant on soundbites and leaks. This is just not good enough.

So here I sit, in the city of Lady Godiva, who rode naked through our streets to protest at her husband’s taxation of the citizens of the city, protected only by her chastity. Here I sit bemused and concerned protected solely by my PC. And whilst all readers would beg that I don’t get on Godiva’s white horse, I think it is time for someone to drag the UK Government and the EU into the real world. I was going to say, “and to open their eyes”, but we all know what happened to Peeping Tom.

Steve Botham

Brexit – where are we now?

The honest answer would seem to be that nobody has got a clear idea.  Many are espousing opinions, but it seems that even those negotiating on behalf of the United Kingdom do not know what they aim to achieve, or at least have no intention of telling UK businesses and citizens what they are up to. The argument that in doing so it would damage the UK’s negotiating position is unsustainable given the outrageous statements which continue to be issues by those in charge of the process for the UK.  Their position seems to be based on the rest of the European Union rolling over and asking the UK to tickle their tummies, which means that nobody needs to know the UK’s position.  Even heavyweight boxers generally show more respect to their opponents.

Matters are not helped by the UK having a minority Government backed by a sectarian party from Northern Ireland. In reality, if the Government believes it is likely to be defeated in Parliament it either fails to put things before Parliament (and right now that includes anything to do with Brexit) or else seeks a last-minute compromise (otherwise called a backdown) in order to avoid a defeat. In the meantime, the main opposition party seems to have no clear policy, seemingly waiting for the Government and its allies to tear themselves to bits, leaving it to sift through the pieces. It is no wonder that rumours of an Autumn General Election persist.

Some clarity, at least, has emerged from the Confederation of British Industry (“the CBI”), a very powerful lobby group, which has set out its case that the UK needs to remain within both the Single Market and the Customs Union.

Right now, the official lines from both the UK Government and the Official Opposition are that Brexit means leaving both the Single Market and the Customs Union, but adopting new measures which won’t be called the “Single Market” or the “Customs Union”, but have the same benefits for all concerned.  There is also talk as to the UK accepting freedom of movement and the supremacy of the European Court of Justice to remain in both the Single Market and the Customs Union. There also appears to be an appetite for a transitional period, at long last, which may avoid the potential cliff edge looming on 31 March 2019.  At the risk of seeming very stupid, I cannot see why the UK would leave the Single Market and the Customs Union to then have something else which is the same, but upon which the UK has no direct political influence and, indeed, the UK has to pay to join.

In the meantime, a phoney war continues with the UK implementing decisions of the European Court of Justice whilst continuing to demand that it should not be the final court for the UK – and here I do see some confusion as my understanding is that the European Court of Justice makes decisions on questions which are then returned to the national court for implementation – in other words, the UK’s national court already sits at the top of the legal tree.

You can fully understand why the CBI has made its call. Business needs certainty, and right now anybody involved in trade with the UK has no such certainty. Indeed, some businesses are making decisions concerning, for example, investment over the coming ten years, some decisions being made today being implemented over the next couple of years. So, what would a business do with, say, €10,000,000 investment on the horizon?  I would suggest that we have some indications already as to what the commercially sensible action is, and it is not to invest in the UK which is a travesty for the UK economy.
So, whilst my world of VAT and Duty will be filled with interest over the coming two to five years, my clients do not wish to have any such fun and games.

Accordingly, I think it is essential for the UK Government and the European Commission to publish their negotiating positions on Brexit.  And I believe those policies should not only be published soon, but also receive the ratification of the relevant Parliaments. Only that way will business see what is on the table and thus be provided with some information upon which to base decisions.  31 March 2019 is not far away!

Steve Botham

The dog ate the books  

In the last Tax Tip, we looked at time limits in VAT.  In this one we’re looking at time limits for direct taxation.  And there are some differences.
Here we are looking at Income tax, PAYE, Capital Gains Tax and Corporation Tax.
The regular time limit for assessment (as well as refunds and claims) is four years.
The time limit for “careless behaviour” assessments is six years.
The time limit for deliberate behaviour is twenty years.

Unlike VAT there is no one year after evidence of the facts or two years after the end of the tax period concerned rules.  However, a closure notice may be used by the taxpayer in certain circumstances to bring an enquiry to a close.  And there is also Human Rights legislation concerning a swift trial where HMRC is seeking a high percentage penalty (or worse).

Once again, the period of assessment for each of the rules is measured against the end of the tax year concerned (except for corporation tax where it is the end of the accounting period).  So, assuming an income tax error which was not careless was made on in the tax year ended 5 April 2013, HMRC would need to have assessed by 5 April 2017 otherwise it would be out of time.  However, if the error was “careless”, HMRC has until 5 April 2019 to assess (and I cannot find an extension to six years for careless errors which cost you money, even where based on an HMRC error!).   And if the error was “deliberate” then HMRC has until 5 April 2033 to assess.

HMRC says careless “is where you failed to take reasonable care to get things right”.  HMRC when training professional advisers on the then new penalty regime explained that the bar over which a taxpayer would need to jump to show that it had not been careless would be lower for a little old man on Dartmoor, than it would be for a small company using an accountant, and that company’s bar would be lower than one employing a professionally qualified finance director, and that company’s bar would in turn be lower than that of a major corporation employing a tax manager.

HMRC is clear that if you make a mistake it will not charge a penalty if the taxpayer has taken “reasonable care”.  And this is a big point – HMRC’s starting point seems to be that you get a penalty for making a mistake, but the starting point before considering a penalty is whether you have taken “reasonable care”.
So, what is “reasonable care”?  Well case law will continue to develop, but the starting point is always what HMRC thinks (after all, who wants to be a test case?).  And HMRC says that ways a taxpayer can take reasonable care include keeping enough records to make accurate tax returns, keeping those records safe (“the dog ate the books” does not help), and asking HMRC or a tax adviser if you’re not sure about anything and following any advice given.  The amount of tax involved is NOT a factor as regards reasonable care, even though we have evidence that some HMRC case workers see it as overriding their published guidance.

Just taking the last point now, the rest I will come back to in a later article, given that HMRC’s view is that you need to prove yourself innocent (and the case worker taking this view will not be correct, but let’s talk about the real world) then you need to have at least contemporaneous notes as to the conversation with your professional adviser or HMRC (and save the note somewhere you can find it again say four years hence).  Normally, your professional adviser will put his or her view in writing,
so that is helpful.  But if you are contacting HMRC’s helpline, then there is no such written confirmation.

And they do make mistakes. So always make a contemporaneous note of your conversation with HMRC and ask them for the “CCELL Reference” for the call.  If the matter is later challenged the CCELL reference will help HMRC to find their record of the call.  Otherwise you risk HMRC arguing that it has no record of your call.

“Deliberate” is where the taxpayer knew that a return or document was inaccurate when it sent it to HMRC.

Examples of deliberate inaccuracies include deliberately (sorry for the tautologous sentence, but here I am quoting HMRC):

  • Overstating your business expenses
  • Understating your income
  • Paying wages without accounting for Pay As You Earn and National Insurance contributions

HMRC fails to tell us what “deliberately” means, although to be fair to them, in the majority of cases it is clear.  However, we recently handled a case where a taxpayer followed an accountant’s advice, which on challenge by HMRC turned out to be incorrect, and instead of treating the error as being after taking “reasonable care”, because a transaction was not reported as a result, HMRC saw this is being “deliberate” and “hidden”.  They backed down eventually.

In summary, I am never sure that “the dog ate the records” argument ever worked, but clearly if the records have been lost through some awful event, like a fire, the taxpayer will have evidence, but will still need to reconstruct those records.  Given that records tend to be kept on the computer that reminds all of us about the need to make back-ups.

What I hope I have made clear is that the time limits for assessment in direct taxes are a little more complicated than sometimes we are led to believe, and that there are examples where HMRC have just got it plain wrong.  Hence, a taxpayer is best advised to seek good quality professional advice from the outset – doing it yourself, a bit like my plumbing, tends to be a false economy.

Steve Botham

It ain’t over until the fat lady sings

This peculiar phrase originated in the United States of America, but has come into popular use in the UK. It normally means the game is not over until the final whistle or something similar. But equally, we know that when the fat lady has sung (one attribution of the saying is that it came from a Wagner opera where the soprano took twenty minutes to wrap up the opera) the game is over. And so it is with tax.

In tax there are rules to the game and we do have a fat lady singing scenario, although as you’ll find out, in VAT at least, she can take two years to shut up. They apply to both sides, although sometimes you would be forgiven for thinking that the home side (HMRC for every match) sometimes loses sight of them. And sadly, the referee is not there at the time, and it is only later that you get to challenge the decision – without the use of a video referee.
There is also a set of rules about the length of the game. These are part of your rights as a taxpayer. I’m going to have a look at them using VAT as an example in this first article. A further article will follow about similar rules for direct taxation. And in a further article I’ll address the importance of penalty negotiations in this context. Finally, in my last article, I’ll look at what is meant by “evidence of the facts”.

So, let’s assume that HMRC has alleged that there is something wrong with a taxpayer’s VAT compliance, perhaps after a routine inspection. Let’s also assume that HMRC have got it 50% right, but that it has taken a very long time to get to this stage – on complex cases a couple of years is not unusual (and is why every taxpayer should have professional fee insurance cover).

For a regular error, the first rule relates to how far back HMRC can go with an assessment. This is four years from the end of the tax period concerned. It is also, incidentally, the time limit for a taxpayer to go back and make a repayment claim AND for voluntary disclosures where the taxpayer owes HMRC money.
So, let’s assume that a recurring error has been made since 1 January 2010, VAT periods end on 31 March, 30 June, 30 September and 31 December and that HMRC decides to assess on 2 June 2017. This means they can go back to the tax period ended 30 June 2013. The periods from 1 January 2010 to 31 March 2013 are out of time for HMRC to assess.

But there is another rule. HMRC must issue its bill within one year of the evidence of the facts sufficient to decide to assess or two years after the end of the tax period concerned. It is complicated, but let’s take the same basic example and add in one fact – HMRC knew about the error and could have assessed on 2 June 2015. This brings both the one year rule and the two-year rule into play. Under the one year rule, HMRC would be unable to assess at all – extra time has finished and they’ve failed to score. However, they then get to go to penalties, and this is where the two-year rule comes into play. This brings in all tax period ended within the previous two years, starting with the one ended 30 June 2015. However, they cannot go back earlier.

Ah, I hear you ask, what happens if the error was “careless” – surely HMRC can go back six years, like they do with direct taxation. No, they cannot. They are still limited to four years in VAT. However, the twenty year “deliberate” time limit does apply to VAT – so in our example, if this was, say, “cash no invoice”, then HMRC can assess right back to 1 January 2010. However, HMRC must still follow the one and two-year rule. We recently had a look at a case and it was clear that whilst the twenty year “deliberate” rule applied, HMRC had completely ignored the one and two-year rule, thus ruling out 18 years of assessments.

So, you can see, there are rules to the game, HMRC are not always as good as they should be at knowing those rules and abiding by them, but if you check out the application of the time limits legislation against the activities of HMRC on a particular case, as we do on every case, it is not unusual to find HMRC is breaking the rules of the game.

So, remember to check out whether the fat lady has sung.

Brexit – Render to Caesar

Some years ago I used this quote only to be brought up short by my former business partner, Tony Borman, who knows his bible, and he asked me to read that part in full. I’m not a religious man, but I was intrigued by the text: –

“And they sent to him some of the Pharisees and some of the Herodians, to trap him in his talk. And they came and said to him, “Teacher, we know that you are true and do not care about anyone’s opinion. For you are not swayed by appearances, but truly teach the way of God. Is it lawful to pay taxes to Caesar, or not? Should we pay them, or should we not?” But, knowing their hypocrisy, he said to them, “Why put me to the test? Bring me a denarius and let me look at it.” And they brought one. And he said to them, “Whose likeness and inscription is this?” They said to him, “Caesar’s.” Jesus said to them, “Render to Caesar the things that are Caesar’s, and to God the things that are God’s.” And they marvelled at him.”

So even within a religious context, there is an obligation to pay taxes according to the law, but no more – which is of course a principle we can all agree with.

And since taxation began, there has been a mechanism to collect taxes, even if it was at times at the point of a sword.

Mutual Assistance Legislation

One important mechanism to collect taxes cross border is the Mutual Assistance legislation.

You may well wonder what this is, and unless it is has been used on your business, it is quite reasonable to never have heard of it. This is legislation within each EU Member State requiring that Member State to collect tax on behalf of another Member State.

So, for example, a German company which should have paid tax in the UK, say on construction activities, does not do so leaving the UK (HMRC) to contact the German tax office for them to collect the tax on behalf of the UK. Or a UK company trading in France fails to pay its taxes, and the French Government can require the UK (HMRC) to collect the tax on behalf of the French.

You may be horrified at this intrusion, but if you think about it, in the UK get annoyed enough about foreign drivers not paying their parking fines, so why not ensure that your taxes are collected – after all, every £ or € of tax not collected is a £ or € more for other taxpayers to pay.

So what is the problem?

At the moment, the UK is aiming to leave the Single Market and, as explained in a previous article, this could result in more EU businesses having to register for VAT, and pay VAT in the UK, as well as more UK businesses having to have VAT registrations in other member states, and pay tax in each of those countries.

Whilst most businesses will play by the rules, and render unto Caesar the things that are Caesar’s, some won’t, either deliberately or through ignorance. The natural recourse is then to fall back on the Mutual Assistance legislation, but that legislation is likely to go when the UK leaves the Single Market.

So just when a country really needs the Mutual Assistance legislation, it will no longer be available.

So where do I think this will go?

I think it is going to be an important political football within Brexit. Why?

Simple, it is about which Government gets to collect the tax money – or not as the case may be. It could result in agreements being made between the major economies as that’s where the bulk of the money will be. But the smaller countries could well object to that. Hence it could take some time to be resolved.

The usual solution as far as the EU is concerned is to have an interim or transitional period. Frequently these transitional periods become the permanent solution, as we saw in VAT following the completion of the Single Market in 1992 – i.e. it didn’t get completed and the pretence of the transitional period was dropped many years later.

The problem from the UK perspective is that our Government has indicated it would resist a transitional period – that said, there’s an awful lot of water to go under the bridge until 31 March 2019.

So, who will be Caesar after 31 March 2019?

So, right now, on tax, we know that all the existing EU rules will drop away, and will need to be replaced with something else, and we also know that even if that is resolved, the ability to collect tax from businesses in another Member State is also at risk.

Do I think all of this will be resolved by 31 March 2019? No I do not.

Do I think that there will be a transitional agreement? Yes I do, but not necessarily on all issues.

In the meantime, businesses need to plan on who Caesar will be from 1 April 2019. And right now, it seems even the parties to the negotiations do not know. This is not helpful for business.

Steve Botham

Brexit – What did the Romans ever do for us?

First, whilst the UK Government has not made this plain, the intention is to retain VAT in the UK and, reading between the lines, in its current form.  That is a relief as, for example, trying to change systems, including invoicing routines, by 31 March 2019 would be a tall order even for the most efficient and well-resourced of companies.

Next, the Conservative Party, which is still likely to form the next UK Government, has made it plain in the manifesto it issued for this election that it intends to take the UK out of both the Customs Union and the Single Market, and to negotiate something which provides the UK with similar (or better) benefits.  A “manifesto” is a set of pledges made by a political party, but these are not promises – the elected Government does not have to stick to them and a cynic might say the evidence is that at least a proportion of manifesto pledges are either ignored, fall away, are clarified or are overturned in the course of a Government (normally five years).  However, in my opinion it would be very difficult for the UK Government to walk away from such a pledge.

So, when it comes to the UK and the rest of the EU parting ways, as regards VAT I am reminded of Monty Python’s The Life of Brian and in particular that famous “What did the Romans ever do for us?” sketch.  I doubt I have picked everything up, but I have set out below what I think the Single Market has done for us when it comes to VAT and trade between the UK and the EU.  And the consequences of the UK leaving the Single Market in particular which, at the minimum, shows what needs to be negotiated and agreed upon before 31 March 2019 to put something at least as good in place.

And this article is going to be lengthier than I anticipated, because there is a lot to be undone and then resolved.

The biggest issue is where to tax transactions and in doing so avoid non-taxation or double taxation.  When it comes to nations, who gets the tax is very important.  And you can certainly boil the crux of the issue down to a few industries to understand where the governments are coming from – the motor industry, telecommunication, broadcasting, the internet and electronic trading, oil, gas and electricity.  Why?  Because this is where the biggest tax yields come from – remember that in reality it is the public that pays VAT – the final consumer – and if your people are buying cars, or watching Formula 1, you want the tax collected from them.

A lot of these rules mean that a business is required to account for VAT in the one or more Member States – local VAT registrations and VAT returns are required in principal.  However, some “simplifications” have been agreed, and if these cannot be replicated when the UK leaves the EU, there will be administrative issues for cross border suppliers.  So, let’s have a look at a few of these simplifications which are at risk.

Supply of goods

The first big simplification is that in most circumstances B2B supplies of goods cross border are VAT free.  Clearly there are no Customs entries, and VAT does not have to be financed on the goods entering the other country.  So, for the exporter, the issues will be ensuring your systems can cope with the new Customs entries and preferably online because that is the way it is going – a model has already been developed between EU countries which if the various countries could pull their fingers out is capable of being adopted in a short period of time to manage this.

One big exception to this rule is where goods are installed or assembled as part of the contract.  In principle if you supply goods, and then install or assemble them in the other country, you are required to VAT register there and charge local VAT.  At present, there is a simplification (subject to various boxes that need to be ticked – but it works) which gets around this and allows the customer to charge itself VAT (and then reclaim it subject to the customer’s taxable status).  This is at risk for both suppliers to the UK and suppliers from the UK from 1 April 2019.

For B2C supplies of goods, at present UK suppliers must register in the customer’s member state (subject to a financial threshold).    From 1 April 2019, unless something else is devised, these will become imports in the recipient member state (mainly I would guess postal imports), and VAT and Duty will have to be paid by the customer subject to any small value exemption which may still exist (the UK has been at the forefront of making the rules for this concession stricter mainly due to supplies from the Channel Islands which were getting into the UK VAT free).  It will be obvious to businesses supplying B2C that such a position is going to be damaging to trade.  So that benefit is at risk – it does seem peculiar calling the distance selling rules a “benefit”, but compared to the alternative, they are.  For example, would you prefer doing a local VAT return and charging local VAT to restructuring your business to create a subsidiary or branch in the other country with all the costs and hassle that would involve?
There are then special rules for supplies of electricity and gas – don’t forget, for example, that there is a link from France where they supply the UK with their electricity (will we need an underwater Customs’ post with an on/off switch?).

Purchases of goods from another member state

The current position, with a few exceptions, is that if you are a business and you purchase goods from another member state, you will acquire those goods VAT free and only pay the tax on the goods when you submit your VAT return (and most likely reclaim it at the same time).  The place of taxation is determined by where the intra-Community acquisition of goods is made (i.e. the Member State where the goods are finally located after transportation from another Member State).
I’ve covered off the distance selling rules and supply and installation contracts already – so I won’t go into those aspects again.

However, I will go into the position of importing from another member state.  Following Brexit, in principal importing goods into the UK (or from the UK) would mean paying VAT and Customs Duty at importation (if the goods are allowed in – quotas etc – something else you will need to find out before contracting to buy or sell goods).  The norm is that unless you pay this VAT and Duty, your goods will not move off the port, airport or terminal.  In the UK, I would doubt that the Duty Deferment facility would change, thus allowing this easement – basically the VAT is paid by direct debit the following month, subject to HMRC holding a guarantee upon a UK bank or insurer.  That guarantee will cost around 1% of its value each year.  It seems possible that clearance times, or even clearance locations, will also be affected, and that is also something that the importer will need to consider.

And then we have “Triangulation”.  For example, this is the situation where the goods move from Member State A to Member State C, but the invoice flows from Member State A direct to Member State C.  I don’t want to go into the various alternatives and complexities here, but the simplification means that the companies in the chain do not have to register for VAT in other countries.  That goes.  From the UK end it may be relatively simple, in that the importation of the goods is taxed as an import (above).  However, if a UK company is selling goods to a French company, and the goods are sourced in Germany, the UK company will have to register for VAT in Germany (where the transportation of the goods begins).  When people tell me that we can just go back to how it was before the completion of the Single Market (1991 and earlier), it is examples like this that make me know that, unless a clone of the Single Market can be negotiated, that just is not going to happen.

In the last 25 years’ supply chains have become more complex and the “old” rules really do not cope with this in a business-friendly way.  I was at Chester Zoo not that long ago and saw a weird plane in the sky above the zoo.  On asking I was told it was transporting plane wings to Toulouse – how will that work come 1 April 2017? Does Airbus relocate the UK operations to a Freeport?  Does it just move production to France or somewhere else in the EU?  Who is going to pick up the extra costs?

Supply of services

The basic rule is that cross border supplies of services are taxed where the customer is.  This could have caused big problems for countries like the UK which have large service industries.  So, some simplifications have been developed over the last twenty-five years to try to relieve a burden from business – registering for VAT wherever your customers are, paying local VAT and all the obligations that go with that.

The solution, for most supplies, is a reverse charge on B2B supplies – once again this principle of the customer charging itself VAT and then looking to recover that VAT is what is relied upon.
This is at risk, and a replica needs to be agreed by 31 March 2019.  If it cannot be, then more UK service suppliers will be required to VAT register in the markets where they trade.  This will add costs, but far worse could be a blockage to trade if the rules are not complied with.

But B2C services could see a far more radical change.  Except for electronically supplied services, where we would hope the current system would persist, just that the UK would be treated the same as, say, the United States is right now, the current position whereby the service provider charges their own VAT is unlikely to persist.  This could result in B2C service providers needing to VAT register wherever their EU customers are located.

I’d guess most suppliers of B2C services would not be so happy about this and some may even choose to withdraw from certain markets as the administrative cost would outweigh the profits that could be made.  Given the lead time for consumer campaigns, the suppliers of services to consumers should be looking at their strategy now.

Summary

One thing strikes me about all of this.  The impact is as great for EU businesses as it is for the UK.  If you take just one industry, cars, there is as much at stake for France, Germany, Spain, Romania and the Czech Republic as there is for the UK.  This then makes me think that the European Commission’s official standpoint that trade negotiations cannot start until the divorce is well on the way to being settled is equally unrealistic as the UK Government’s position now.

So, I hold my breath and once again think what the Single Market has done for us.  And if both parties to the negotiations do not wish to burn their boats, or throw the baby out with the bathwater, perhaps a viewing of The Life of Brian would help bring them to their senses.

International trade – the Single Market free trade area

That may seem a peculiar title, given the hype in the UK over the Single Market, but that is why Mrs Thatcher was so supportive of it at its inception, through the signing of the Maastricht Treaty on 7 February 1992.

The Single Market is about free trade, not just removing tax barriers, but also removing hidden trade barriers – for example, individual countries with peculiar labelling requirements aimed at protecting local businesses. It has got nothing to do with myths like straight bananas, but it does mean common standards across the EU, many of which are for the protection and safety of consumers.

On 1 January 1973, Ted Heath’s government took the UK into the “Common Market”, something which UK politicians and commentators now hark back to with rose tinted spectacles as a free market. It was not a free market. There were a lot of barriers to trade including tax rules and more hidden blockages to trade. The Common Market needed urgent reform which is what led to the Maastricht Treaty. One of the changes that the UK drove was the free movement of labour, as to date there had been significant border controls for not only goods, but also people. Please note the time scale.

Like many UK VAT consultants in 1991 and 1992 I was heavily involved in getting ready and implementing the changes that arose during the formation of the Single Market. I remember speaking at a couple of major CBI events pointing out some of the negative aspects and Intrastat, which had, and still has, criminal sanctions, and was to be used to compile cross border trade statistics. I argued it was an unreasonable burden on business, could be achieved just as accurately by statistical sampling of a smaller population of businesses, and a criminal sanction for trade statistics, which were already notoriously unreliable, was just plain unreasonable. I still hold those views.

However, my main concern was the VAT rules, where we had some big changes to make trade in goods, and to a lesser extent, trade in services easier between member states. The aim was to remove the burden of VAT on cross border transactions – in other words treat the whole of the EU as a single market so you could sell just as easily to Madrid as you could to Manchester.
Sitting around the Single Market was the trade wall created by the Customs Union. Here businesses from outside the EU had to knock on the door, ask to come in and then pay an entrance fee to gain access to the market.

There have been revisions over the last 25 years, but largely it has worked well so that a massive amount of UK goods and services are exported to other EU member states.
Politically, in the UK, the sticking point is not having the free trade area, but the movement of labour within it. I won’t go into the arguments presenting themselves over the last year or so, but anyone with a need for labour, whether cheap or skilled, will understand the UK’s need to bring this labour into the country. Similarly, skilled UK people work in the rest of the EU. And of course, EU companies, when selling goods or services to other EU countries may need to send staff there to do the job, and the free movement of those staff is essential to getting the job done.
So, the question is, what will happen after Brexit, now less than two years away unless the UK sees sense and accepts the offer of a transitional arrangement? I say that partly because the UK is intent on a basis of negotiation that no deal is better than a bad deal (I’ve no idea what the parameters are for a “bad deal”, and nor does anyone else as far as I can see) and partly because I know and understand the timescales required to make changes in the EU, the political arguments that are made, and things being held up because a smaller state, or even region, as in the case of Walloon in Belgium during the negotiation of the Canada/EU trade agreement, wants something that may not be at all connected with the issue at hand – it is a bargaining point for them. That latter issue may be a fault with the way the EU is organised, but it will only be changed from within.

So, having set a more accurate scene, what will happen when the UK leaves the EU? Well the first point is that the current UK Government, which is likely to be returned in the General Election on 8 June 2017, is likely to retain its determination to leave both the Single Market and the Customs Union. The UK will be knocking on the door. It will have to pay to get in, and that may be in terms of a national bill, or duty paid by importers of goods, or both (more likely).

When doing things inside the EU, including performing services, installing or assembling the goods you’ve sold, keeping customer stocks – the list goes on – if “simplifications” cannot be agreed, UK companies would have to register for VAT in at least one EU country, and for those trading EU wide, all of them. Similarly, EU suppliers of goods and services would have to register for VAT in the UK.

Each would have to comply with the rules in the countries where they have VAT IDs. And local VAT would have to be charged.
On top of that UK suppliers’ staff may not be permitted to travel freely to EU member states, or rules could be applied requiring local staff to be used – and, of course vice versa.
There would be no protection from other “hidden” trade barriers. As regards the hidden barriers, like labelling, even whilst outside the EU, UK businesses would need to adhere to those rules if they want to successfully export to EU member states. Part of “coming out” was to ditch red tape “imposed by Brussels”. Well, the UK may well succeed in ditching some Brussels red tape (I have absolutely no idea what, apart from getting rid of Intrastat which would please me), but it would find that at least an equal volume of red tape for exporters to the EU is created – Intrastat goes (hooray) and exporters of goods have to go back into standard customs clearance procedures which will be a lot more costly and demanding than Intrastat.

You can see why, therefore, business leaders, in the main, have been calling for a “soft Brexit” and if nothing else retaining access to the Single Market, although by implication the UK would need to remain within the Customs Union. One country within the Customs Union is Turkey with whom UK business, endorsed by the Government, entered into a £100marms contract in January 2017. Unless that contract consists of boxes of Lee Enfield rifles capable of being shipped straight away, BAE might find itself with additional costs on the contract. At the time of signing the contract, the intention was that this would open the way to £16bn trade between Turkey and the UK. How will that materialise when the UK and Turkey sit either side of the Customs Union’s wall?
So, what must businesses trading between the UK and the EU do? I think the old maxim of planning for the worst and hoping for the best is about the best strategy, unless you’re big enough to negotiate a sweetheart deal.

So, this provides a glimpse of the issues which both UK and EU businesses face as the UK strides purposefully towards the Brexit finishing line. I’d guess as far as business is concerned, we’d all hope that that is not also a cliff edge.

Steve Botham

International Trade – the Customs Union and the UK

First of all, apologies in advance if we’re teaching our grandmother to suck eggs. However, we thought it would be helpful to set down a “simple” explanation of one of the current issues of our time – the Customs Union.

The Single Market is not the same as the Customs Union.  The Single Market is about trade within the EU trying its best to make trade between EU member states free of Customs Duty, Tariffs and other blockages to trade. The Customs Union is a fence around the EU member states, and a few other countries, and other countries cannot send goods through that fence unless agreeing to play by the rules, which on occasions means paying an entrance fee.

The position until March 2019 is that nothing has changed – the UK is still in both the Single Market and the Customs Union.

However, there already seems to be some confusion as to what happens in respect of issues such as Customs Duty and Quotas for trade between the UK and other countries after Brexit.

Trade between other countries (“third countries”) and the UK continues under existing rules, may be subject to trade agreements between the EU and the third country, and may well be subject to import duties both on goods coming into the UK and on goods going into third countries from the UK. It is also possible that “quotas” may be applied – quotas is a system whereby only a certain amount of goods can be imported within a specific period of time.

It seems likely that the current Government will be returned after the 8 June General Election in the UK. The current UK Government seems committed to leave the Customs Union as well as the EU’s Single Market.

Accordingly, right now, the most likely position from March 2019 onwards is that exports from the UK (which will then be a third country) and the EU, as well as exports from the UK to third countries will, at least for the time being, fall back on World Trade Organisation (“WTO”) rules – the agreements made between the EU and third countries will no longer be valid for exports and imports. And, of course, the UK will no longer have a favourable trading status with the EU.

Similarly countries exporting to the UK will no longer do so under EU trade rules, but instead will also be reliant on WTO rules until and unless trade agreements are made between the UK and that other country which say otherwise. That applies to both EU exporters and third country exporters. Trade agreements between the EU and third countries (the UK) typically take several years to agree. The same is generally true of other bilateral trade agreements.

The EU already has trade agreements with many of the countries with whom the UK Government expects to do more business after Brexit. Those trade agreements will fall away after Brexit. Until and unless new bilateral trade agreements are entered into with those countries, the terms of trade between those countries and the UK will be, in the main, worse than they are now. Hence, somehow, new trade agreements will need to be entered into in record time. Some existing suppliers, say to the car industry in the UK, will be met with trade barriers which will increase the cost of their goods in the UK – that applies equally to EU and third country suppliers – which in turn will push up the costs of UK car manufacturers and assemblers.

The EU does not, and never has, inhibited any member country’s ability to trade with a third country – despite what various UK politicians seek to imply. There are trade embargoes, much as with those arising from membership of the United Nations, and I would imagine that most people in the UK and the EU would be happier not trading with “rogue states”.

However, what is done, as within any trading bloc, or with any country seeking to protect its own market, is that trade barriers are put in place to protect the home market (and they may also raise tax revenue!). Currently the rules are clear (but complex) for both imports into the UK from third countries and exports to third countries from the UK. New rules will be equally clear (but complex) after Brexit.

We know that some large companies intend to advance purchase goods (finished goods and components) from the EU in particular prior to Brexit, and we understand a stockpile of six months goods is typical.

We’re sure that there is much more that needs to be considered for individual businesses, but what we hope to illustrate is that the impact of Brexit on international trade will not be simple, there will be grey areas and nuances, but whilst the UK seems intent on ignoring an EU offer of a transitional period, there could be a significant cliff edge effect for many businesses exporting from the UK and exporting to the UK. It is clear that all businesses need to start planning for Brexit now, if they haven’t done so already (like the ones planning to stockpile).

A budget for small businesses?

The recent budget was noteworthy for being light on content.  Small businesses however will probably feel as though someone stole their sweeties after being hit by a triple whammy of costs and charges

Firstly of course, there was the now notorious increase in Class 4 National Insurance.  Many small businesses had been looking forward to the £200 or so saving that the abolition of class 2 would bring, but Mr Hammond took that away with an increase of roughly £400 in each of the next two tax years for small businesses paying the top end of self employed National Insurance, so by 2019-20 they will be paying £50 a month more

Secondly, there was the confirmation that quarterly tax reporting will come in next April for private landlords and unincorporated businesses.  HMRC’s response to the sensible and measured proposals sent to them in response to their plans has basically been to ignore them.  The smallest businesses get a one year deferral, but for most the system comes in next April. Given that one of the larger software suppliers has said the first versions of their Making Tax Digital (MTD) software will be available later in the year, that is a very tight timetable, and to make matters worse, it seems there will after all be a cost for the software.  No doubt the “savings” HMRC promised will turn up eventually

If all that was enough to make small businesses think of incorporating (which would at least defer the start of MTD), the final whammy coming in next year is the reduction to £2,000 of the dividend allowance – effectively clawing more tax off hard pressed small businesses whose right to extract profits by dividend had already been attacked in last year’s budget by the surprise withdrawal of the dividend tax credit

All in all, not really a very friendly budget for small businesses