After Brexit: will your company be ready for a new tax world?
The Business of Tax British businesses are set to lose tax advantages when the UK leaves the EU VAT regime post-Brexit. What — if anything — should firms be doing to prepare for a new tax landscape?
There could be a surge in VAT compliance bills for small and medium sized enterprises post-Brexit. It is estimated that 27,040 UK small businesses selling goods online across the European Union could face an annual £772 million VAT compliance bill. On top of that, new EU VAT registration and returns obligations could cost as much as €28,568 per annum for each business.
SMEs selling to the EU may need to revise their business models
“UK companies selling goods to Europe enjoy a number of VAT simplifications — or advantages — inside the EU VAT regime,” says Richard Asquith, VP Indirect Tax at Avalara. “For example, if sales are under the national registration thresholds set by each country, small companies and micro businesses don't have to VAT register with all the different countries they sell to. But that will change when the UK leaves.
“The best thing for companies to do, is to make sure they have mapped out where there is European VAT in their supply chains."
HMRC estimates this will impact 132,000 companies, while the EU estimates that the cost of VAT registering will be around €5,000-€6000 per annum, per country. That would have a dramatic impact and could undermine SME's business models for selling to the EU.”
Bigger UK players — such as pharmaceutical or aerospace firms — will also face challenges when buying from EU companies because they will no longer enjoy zero VAT rating on their sales to other EU states. “So, a UK company selling to a French company will have to pay French VAT on that sale of 20% for the first time,” says Asquith. “This money can be reclaimed but, inevitably, that's a bureaucratic process — and a big drain on cash flow. Although businesses should stand to get the full amount back, there is always leakage in the system, and companies can expect to lose around 5-10% of this VAT cost. ”
Preparations for leaving the EU VAT regime
The UK leaves the EU on 29 March 2019, with political agreement on a transition period lasting until 31 December 2020. “During this time, the UK will stay inside the single market, customs union and EU VAT regime,” says Asquith.
“What is unclear is what happens beyond that. My own belief is that what has been called a 'transition period' will actually be a 'standstill period' while the UK negotiates its position. I think it will soon become obvious that the UK will need a genuine transition period from 1 January 2021 — which could last for two years or even more.”
The agreed transition period to December 2020 has given UK companies the breathing space to relax a little. But the fact is that it's difficult for businesses to prepare for a post-Brexit tax landscape when it's unclear what that landscape will look like.
“The best thing for UK companies to do is to make sure they have mapped out where there is European VAT in their supply chains or e-commerce models, and then think about what their VAT liabilities would be if simplifications were lost,” says Asquith. “I'm afraid that until the clouds clear about the terms of our departure, there's really very little else they can do.”