Series 11 - Back to Brexit Basics – the VAT cost

Jul 03, 2018

Last week, in Series 10 of Back to Brexit Basics, we looked at the three customs options that are currently on the table in the Brexit debate.  This week we look at how Brexit could give rise to an upfront VAT cost on trade between Ireland and the UK and we examine a solution to this cash flow issue.

Measuring the VAT cost of Brexit

The way VAT arises on goods imported into Ireland from the UK and into the UK from Ireland will change after Brexit.  At the moment, both the UK and Ireland are EU Member States and such goods are treated as intra- community acquisitions.  The purchaser is required to self-account for VAT on a reverse charge basis.  This means that the purchaser has to account for the VAT on the purchase of goods from the other EU Member State. 

For business to business purchases, the supply is zero-rated in the Member State of dispatch and the purchaser accounts for VAT in their VAT return that is due for the period in which the acquisition took place. The rate of VAT is the rate that would apply in the purchaser’s Member State.  If the purchaser is entitled to an input credit for the VAT payable on acquisition, they can claim this on the same VAT return.  

For example:

A trader in Ireland purchases goods to the total value of €10,000 from the UK in May 2018.  These goods will be onward sold as taxable supplies in the Irish business.  The UK company does not charge VAT on the supply to Ireland and instead the Irish trader charges themselves VAT at the rate applicable in Ireland (23%) which amounts to €2,300.  The Irish trader can then also claim an input credit of €2,300 as the goods were purchased for taxable supplies (and assuming the purchase is deductible for tax purposes).  Therefore from a cash flow perspective, no VAT is payable on the VAT return in respect of this transaction.

After Brexit

Looking at this scenario after Brexit, the goods purchased from the UK into Ireland will be regarded as imports from a country outside of the EU.  For imports from outside the EU into the EU, importers must pay the VAT to the Revenue Commissioners in Ireland, or HMRC in the UK, at the time when the customs duties are paid rather than  at the time of filing their VAT returns.

Imported goods are liable to VAT at the same rate as applies to similar goods sold in the importing country.  The value of the imported goods for VAT purposes includes customs duty, anti-dumping duty and excise duty (excluding VAT), and certain transport, handling and insurance costs.

Therefore taking the above example, the VAT of €2,300[1] that arises for the Irish business on the goods imported into Ireland from the UK becomes payable to Revenue in Ireland immediately on importation in May 2018.  The Irish trader then claims an input credit of €2,300 in the May/June 2018 VAT return which is filed weeks later in July 2018 (assuming returns are filed bi-monthly).  In contrast to the intra-community acquisition scenario, the Irish trader in this situation has an upfront cost of €2,300 which it can’t claim as a deduction for several weeks.     

It should be noted that at the moment for imports from outside the EU into Ireland, most traders have a deferred payment account with Revenue which means that the amount of VAT that is due is not taken from the traders account until the 15th day of the month following importation.  However for many traders that only trade with the UK or other EU Member States, they will not have a deferred payment account with Revenue.

A possible solution?

A possible solution to this problem in Ireland, at least for some traders, is the postponed method of accounting for VAT which is provided for in Article 211 of EU Council Directive 2006/112/EC. The UK’s replacement of EU VAT legislation could permit an equivalent solution as part of the exit arrangements with the EU.

Under postponed accounting, importers do not pay import VAT at the point of entry 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 existing mechanisms for cross border trade within the EU described above. 

Update: Both the UK and Irish government have said that they will implement the postponed method of accounting for VAT in the event of a no-deal Brexit.

Adopted in several other EU Member States

Several other EU Member States such as Bulgaria, Poland and Romania have already adopted the postponed method of accounting into domestic legislation and it is felt that an adoption of the provisions by Ireland and the UK would benefit Irish and UK businesses greatly in light of the level of trade between Ireland and the UK.

The majority of EU countries that have adopted the postponed method of accounting have land borders with non-EU countries and trade with these countries. This highlights the importance of the method and will be paramount given the land border on the island of Ireland.

Leaving the EU without this or a modified version of this proposal in place in either the UK or in Ireland, would mean a cash flow benefit of VAT payable on imports for each exchequer but the cost of this would be borne by businesses that need to pay the VAT up front and then recover later. This would create cash flow costs and administrative burdens – all generated by Brexit – and none of which exist at present. 

Chartered Accountants Ireland has been calling for the introduction of the postponed method of accounting for VAT for the past 12 months and has this week issued a joint press release with the Institute of Chartered Accountants of Scotland (ICAS) calling for action.

Read all of our Brexit updates and Back to Brexit Basics on the dedicated Brexit section of our website.

[1] Assuming that €10,000 represents the total value for VAT purposes