VAT on 'Imports'
This last week has seen the spotlight on VAT for goods coming from other EU countries as the Taxation (Cross-border Trade) Bill ('TCBT') makes its way through Parliament.
Essentially, the current VAT system in the UK would be abolished in respect of such goods and replaced with legislation which will treat goods from other EU states as 'imports'.
UK businesses are up in arms over timing and cash flow differences between this and the current system.
Currently, goods arriving in the UK from the rest of the EU are not treated as 'imports' but as 'acquisitions'. At the most basic level an 'acquisition' is defined as taking place where:
- there is an intra-EU movement of goods to the UK;
- the goods are received in the UK by a registered UK VAT trader; and
- the supplier is registered for VAT in the EU Member State of departure.
The VAT rate on an acquisition follows the normal UK rules, so this will be 20% unless the goods are subject to a special regime, e.g. a zero-rating.
The important point is that an acquisition is accounted for as if it were a 'reverse charge'. What this means is that the UK person is treated as both making and receiving a VAT-able supply. They are deemed to have charged VAT and this has to be accounted for in the period when the supply is treated as taking place – this is the earlier of the 15th day of the month after the month in which the goods are sent, or the date on which the supplier issues their invoice (which cannot be later than the 15th day of the month after the month in which the goods are sent).
They are also deemed to have incurred VAT and this is recoverable under the normal UK rules, so that anyone who normally recovers all their VAT would be able to recover this deemed VAT. The net result is that there is no upfront payment of VAT from the trader to HMRC, as this is reduced to a series of paper accounting entries.
The import system is different. Here goods are not normally released by HMRC until the UK trader has paid VAT upfront (and for that matter duty as well, although a discussion of this is outside the scope of this article). The new Bill turns a paper cashless exercise into a cash flow problem (even though the VAT paid upfront can ultimately be recovered in the normal way).
So, is the position black and white? Perhaps logically it should be, as there will be those who say that if the UK has no EU membership there should be no free movement of goods. Such voices may come from within the EU, but also from those outside of the EU selling goods into the UK who can only sell their goods to those who can cash flow the VAT. The creation of a cash flow problem is obviously unwanted by business, but to be fair, also by the UK Government, which has always been open to mitigating the pain which a strict change would make.
What, if anything, can be done to a position which is as unhelpful as it is clear? Well, the position has to be considered in the light of the provisions of the European Union (Withdrawal) Bill (EUW); this has provisions to retain elements of EU law, including VAT. The explanatory notes to the TCBT Bill recognise this, setting out that 'in the absence of a negotiated agreement, these goods will fall to be treated as imports'. The EUW Bill itself may well have the effect of retaining existing EU VAT law, so the TCBT Bill also gives the Treasury powers to exclude EU VAT law retained by virtue of enacting the EUW Bill.
In short, we may soon have two new UK Acts of Parliament with conflicting provisions in relation to the VAT on goods moving from the rest of the EU into the UK. In the end, the Treasury will decide which way to go by covering the position through a statutory instrument. Black and white? Yes, but black and white at the same time means grey.
For further information, please contact Simon Rose, Partner and Head of Tax