The VAT dilemma

When the UK leaves the EU, imports of UK goods into Ireland will give rise to an upfront VAT charge. What’s the solution?

When traders in Ireland purchase goods from the UK, VAT isn’t a top of the list of issue for many. If you are registered for VAT in Ireland and receive goods from another EU country, you normally account for the VAT through your VAT return using the reverse charge mechanism. This means that the VAT you would have paid if you bought from an Irish supplier is accounted for, and you simultaneously reclaim this amount on the same VAT return (assuming it relates to taxable supplies). This usually results in no VAT paid over to Revenue. However, this treatment only applies to purchases made from EU countries. When the UK leaves the EU on 29 March 2019, VAT will apply upfront for Irish traders when goods are purchased from the UK, thereby making VAT an important consideration.

What will change?

When valuing goods for VAT purposes, importers must include the cost of goods, the related freight, insurance and the customs duty before applying VAT. The same rate of VAT that would apply if goods were purchased from a supplier in Ireland will arise for importers and this must be paid to Revenue at the same time as customs duties. So VAT becomes due immediately on import (when customs duties are paid) rather than when the next VAT return period is due. The VAT suffered can only be claimed as an input credit in the next VAT return, which could be 10 weeks later.  For businesses in Ireland that import from the UK, this timing change is likely to put a significant cash flow burden on them. On average, €3 billion of goods are imported into Ireland from the UK during every two-month VAT period. This requires some sort of solution.

A possible solution

A possible solution, at least for some traders, is the introduction of the postponed method of accounting. This method is provided in EU law, specifically in Article 211 of EU Council Directive 2006/112/EC. Under postponed accounting, importers do not pay import VAT at the time customs duties are paid, but must declare the payment of their import VAT in the next VAT return period and deduct the relevant input VAT in the same VAT return. The effect is comparable to the reverse charge mechanism that applies when purchasing EU goods. This method has the benefit of eliminating the cash-flow disadvantage for the trader.

VAT periods affected

Under this method of accounting, importers who file bi-monthly VAT returns would defer payment of the VAT that would arise on Brexit day 29 March 2019 and instead declare it on 19 May 2019 when VAT returns and payments are due for the month of March 2019. On this return, importers will take a simultaneous deduction for VAT suffered on the VAT return, thus neutralising the VAT cash-flow effect.

The Exchequer’s perspective

The Exchequer should not be disadvantaged by changing the VAT method. Only one VAT period would be affected by a change in method and the position would neutralise over the year.

Other EU member states

17 EU member states  including Bulgaria, Poland and Romania have already adopted the postponed method of accounting in their domestic legislation. The majority of these countries have land borders with non-EU countries and trade with these countries, which highlights its importance for Ireland. For Ireland to introduce the postponed method of accounting, it would need to notify the EU that it intends to amend the Irish VAT legislation. No derogation is needed to apply Article 211. The EU has a relatively relaxed approach with regard to how countries implement the postponed method of accounting. Some EU countries have rules which say that only established traders can use the method while in other countries, a trader only has to be registered for VAT to use the method. In other member states, traders need to have a good tax compliance history with no unpaid debts.

Risk of fraud

There is scope for fraud and to combat this threat, many countries ensure that the correct exchange of customs information is in place and appropriate penalties and anti-abuse measures are present in domestic legislation.

Benefiting business

Brexit will dramatically change the way in which importers in Ireland apply VAT on imports for the UK. In addition to the much-needed cash-flow benefit, the postponed method of VAT accounting would reduce the administrative burden for businesses and the Revenue Commissioners, and could make Ireland more attractive for large companies wishing to set up a base in the EU. With the current threats imposed on Ireland by the UK leaving the EU, this measure would go some way towards dealing with such risks.

Cróna Brady ACA is a Tax Manager at Chartered Accountants Ireland