The European Union (Withdrawal Agreement) Bill received royal assent on Friday 24 January 2020 and yesterday the European Parliament overwhelmingly approved the terms of the Withdrawal Agreement (WA), confirming the UK’s departure from the EU on Friday 31 January 2020 at 11pm (Brexit Date). As a reminder, the Bill was introduced to implement the revised WA, which was agreed at political level with the EU in October 2019. Most notably, the WA seeks to address the controversial question of the Irish backstop which was scrapped and replaced with a new arrangement.
With Brexit Date fast approaching, we consider the VAT and customs implications that Brexit will have in both the short and longer term.
In the immediate aftermath, the good news from a VAT perspective is that much is expected to remain the same; the EU VAT Directive and customs regulations will continue to apply and the UK will remain part of the EU Single Market and Customs Union. This means that goods will continue to move freely between the UK and other EU member states (and vice versa) and rules around services will stay largely the same.
Decisions of the Court of Justice of the European Union (CJEU) will remain binding on the UK courts except where the Supreme Court decides, on its own accord, to depart from a CJEU decision in line with the existing rules. However, it is worth noting that the Withdrawal Bill allows regulations to be made which permits lower courts or tribunals to depart from retained EU case law in circumstances provided for in the regulations (see our earlier blog). Whilst it is too early to predict how, and if so when, these regulations will be used, it will be interesting to see the impact (if any) that this will have on CJEU decisions handed down this year. We would not expect much divergence though as the EU VAT rules continue to apply.
During the transition period, the UK will be working with the EU to agree the terms of a Free Trade Agreement (FTA) which is expected to come into effect at the end of the implementation period. Assuming this is the case, the FTA will dictate the relationship between the UK and the EU which will in turn determine the impact that this will have on existing VAT and customs duties rules.
If the FTA is not agreed by the end of the transition period and the transition period is not extended beyond 31 December 2020, the UK will find itself bound by the WTO rules meaning that all future trade would take place on WTO terms. From a VAT perspective, this will be reminiscent of a no-deal Brexit and the impact it was expected to have on the supply and movement of goods, and to some extent on the supply of services, between the UK and the EU. In particular:
- goods imported from the EU to the UK will switch to the existing rules for imports from non-EU countries. Businesses will need to be prepared for import VAT to be paid, although we would expect the government to continue with its plans to implement a VAT deferment scheme (where import VAT can be declared and recovered on the same VAT return) to alleviate potential cash flow implications;
- goods exported from the UK to EU businesses will be treated as an export with a corresponding import charge when the goods enter the EU. Businesses may need to register for VAT in various EU countries or will need to use the non-EU refund scheme to recover EU VAT. Customs duties will of course be irrecoverable; and
- whilst services are expected to be affected by a much lesser degree, certain simplification measures such as the Mini One Stop Shop (MOSS) will no longer be available for supplies of electronically supplied services to EU customers.
The most notable difference between a “no-FTA Brexit” and the previous “no-deal Brexit” is the role that Northern Ireland will play in all of this. Under the WA, the UK and the EU have agreed that Northern Ireland will remain part of the customs union of the UK and of the EU Single Market and Customs Union until the terms of the FTA are agreed. This will result in a border in Northern Ireland where goods coming from Great Britain into Northern Ireland but intended to be moved to an EU country (Republic of Ireland and further) will be checked and import VAT and customs duties levied before the goods are released in the EU.
There are, however, a number of points which need be worked through. Whilst the WA envisages that checks will be carried out by UK Border and the tax will be collected by HMRC, the EU will retain its powers under the existing treaties. This also raises a number of questions over how the arrangement would operate in practice, in particular:
- whether businesses will be required to complete and file customs declarations every time goods are moved from the UK to Northern Ireland (and vice versa);
- the ability of HMRC and UK Border to deal with these additional customs checks and controls and to police the arrangement to ensure that it is not subject to fraud whereby goods (intended to be moved to the EU) are moved to Northern Ireland and then transported over the Irish border without payment of VAT and customs duties. A UK-EU joint committee will be set up and one of its functions will be to identify goods which are particularly at risk and on which taxes are expected to be paid upfront and later reimbursed if the goods stay in Northern Ireland; and
- whether goods coming into the UK (through Northern Ireland) from the EU will be subject to the same degree of checks. The UK has indicated that it intends to move away from full alignment with the EU rules and it is conceivable that there might be less scrutiny on goods coming in from the EU but would that leave the UK exposed?
These questions are largely unanswered at this stage and in the course of the next few months, the government’s attention will undoubtedly be focused on negotiating the FTA, leaving once again little time for preparations in the event of a “no-FTA Brexit”. To some extent, we would expect the government to roll over the existing no-deal Brexit preparations. Businesses should be prepared for this eventuality.
With only 11 months to go, Brexit planning is likely to remain on the agenda, for a little while longer.
But rather than constraining the rest of Britain inside the EU’s customs union, the “frontstop” instead places a new regulatory and customs border in the Irish Sea. And the accompanying prospect of checks between Northern Ireland and the rest of the UK has quickly become one of the more contentious points of Mr Johnson’s Brexit deal.