The trade debate in the wake of the Brexit referendum vote was dominated by customs and tariff issues, and little attention was paid to VAT. However, it has become clear in the interim that VAT has the potential to create real difficulties for Irish companies in terms of cash flow, an increased administrative burden, and a potential loss of competitiveness.
New Language and Terminology
Among the first things we are going to have to change is the language and terminology we use, according to Crona Clohisey, Tax and Public Policy Manager with Chartered Accountants Ireland. “At the moment, VAT is seen as a European tax,” she explains. “It is different to corporation or income taxes where member states set their own rules. There can be slight differences for certain VAT rules but by and large they are the same across the EU.”
All the rules are the same in terms of aspects such as where VAT arises, who is the taxable person, and so on. “Makes it easy to trade and carry out transactions across Europe,” Clohisey adds.
Trading with the UK
“If the UK leaves, they will have the freedom to make and implement their own rules,” she continues. “They have indicated they are going to keep their current VAT system and won’t deviate too much. But in saying that, when companies import from within the EU that’s treated as an intra-community acquisition. Imports and exports only apply for trade with countries outside the EU. We are going to have to change the language and terminology we use for trade with the UK for example.”
At present, when the EU makes changes to the VAT rules it issues a Directive and every country has to implement that by transposing it into national law. The rates of VAT and the thresholds for registration may vary slightly from country to country but the rules are essentially the same. “But the UK can in reality do whatever they want after they leave,” Clohisey notes.
Impact of VAT on Cash Flow
The system, as it operates at present, is very straightforward. When a company registered for VAT in Ireland purchases a product from the UK, no UK VAT is charged. The Irish company self-accounts for VAT using what is known as a reverse charge mechanism. The Irish VAT charge is applied in their next VAT return and a simultaneous credit is taken for it as if a reclaim had been made.
That will change following Brexit, however. Imports from the UK will attract an Irish VAT charge at the time of import and this VAT will have to be paid immediately rather than accounted for at the time of the next VAT return. “When the UK becomes a third country, UK exporters to Ireland won’t charge VAT. Once the goods from the UK arrive in Ireland, the Irish VAT rate, usually 23%, is applied and must be paid immediately by the importer along with any customs duties. The Irish importing firm can deduct this from their VAT payable on their next VAT return, but that presents cash flow issues. If a company is making VAT returns every two months, it can be up to 10 weeks before they reclaim the VAT already paid on import.”
That will not apply to every company, however. “A lot of established traders have a deferred payment account with Revenue and may be able to postpone the payment of upfront import VAT,” Clohisey notes. “Revenue recognises these companies as reliable trusted traders. But that’s not really applicable to smaller companies who may not have a deferred payment account, as you have to through quite a rigorous process to get this.”
In the event of a No Deal Brexit
The good news for Irish companies is that the government’s Omnibus Bill, which makes provision for a no deal Brexit, allows for the postponed method of VAT accounting. This means that importers won’t pay VAT on imports from the UK immediately on import and instead can account for it in the same way as before the UK left the EU. In effect, it would be the same arrangement as for trading with an EU member state.
“We don’t know what the practice will be if there is a deal,” says Clohisey. “But there is a lot of lobbying going on for this mechanism to be there regardless.”
These same issues apply in reverse for Irish exporters to the UK. While they will not charge VAT on an export to a third country, their UK customers will be required to apply it and reclaim it later if the UK keeps to the same VAT rules. “This will place an additional cost on those customers and may have an impact on the competitiveness of Irish exporters,” says Clohisey. “This is very much in the hands of the UK government.”
VAT Issue for Online Selling
Online sales to consumers will also be affected. “This is something that is going to change a lot,” Clohisey points out. “When an Irish consumer buys online from a UK entity at the moment there is no customs and VAT is generally contained within the advertised price. But if the same consumer buys from Australia or the US and the value of the goods purchased exceeds €22, Irish VAT will apply, and customs duty may also be payable. When the mail is delivered to your door you are asked to pay the outstanding VAT and customs duty.”
If those same rules apply to goods from the UK, after Brexit, this will mean VAT and customs might have to be paid at the front door by Irish consumers.
“Brexit has thrown up a lot of things we wouldn’t have thought of before. UK citizens will be entitled to claim VAT back on their shopping in the Republic of Ireland in the same way that American citizens are. This could have significant implications for cross-border shopping,” says Clohisey.
Seek Professional Advice
Another slight headache relates to VAT reclaims on business expenses incurred in another EU member state. “When VAT is incurred in another EU country, a company can claim it back through their local VAT authority,” Clohisey explains. “Once the UK leaves, it will no longer be covered by the EU VAT Refund Mechanism and companies will have to go to each member state individually to reclaim any EU VAT incurred. That’s one more thing to think about. Companies should sit down with their accountants to discuss the VAT issues that Brexit will bring as VAT rules can be confusing at times. Most companies probably have their VAT systems set up very well, and now they may have to alter them to deal with a whole new set of rules. The sooner they get professional advice the better.”
Understand the impact of VAT and other factors on your working capital through the Brexit: Act On Initiative.