Brexit Trade, Customs and VAT Tax for Expats
ProACT Sam clarifies the reasons why Customs Union, Trade and Hard Borders are the sticking point for Brexit decisions.
VAT ACROSS BORDERS
VAT is an EU tax that every business in the EU has to charge on sales.
The revenue flows through the EU coffers and provides for the running of EU institutions, grants and subsidies.
Each sovereign country in the EU gets to collect and keep this VAT.
Individual countries set their VAT rate at a minimum rate of 15%, with options to set a reduced rate on specific goods at 5% or more.
Turnover levels for businesses which trigger a requirement for VAT registration are set by each country. As a general rule, any EU business must be registered for VAT at Euro 50k turnover. Some countries have a lower threshold, with a minimum in Netherlands and Spain of zero, all businesses must be VAT registered.
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EXPORT RELIEF
VAT is charged on sales within an EU country at the national rates for that country.
VAT is not charged when goods are exported from the home country.
This means an EU business could export outside the EU - and not have to charge VAT on that sale, allowing a clear pricing advantage for export sales from an EU country.
If the export is made into another EU country then the exporter does not charge VAT - they export to the EU country free of VAT. However, if that export is from the UK to France, then the French business selling the imported item should charge VAT at the French rate to the end user. France therefore collects the VAT sales tax on the item manufactured in the UK.
TAX LEAKS
The VAT system is not perfect. Tax authorities estimate billions are lost in VAT revenue each year.
The current EU VAT system is a temporary and transitional arrangement from 1992. It has taken the EU 27 years to not finalise a VAT regime and call it permanent.
This is an example of concern for those dealing with the EU from the outside: that future trade and customs agreements may be indefinite and long winded.
The leaking system within the ‘EU free trade zone’ is managed by border checks. Despite suggestions of how impossible managing borders may be, the EU has already been doing this on a temporary basis since 1992.
There are essentially 3 ways for any government to check that the correct tax on import export trade is being paid:
1. Hard barriers at the border
2. Checks at the border as goods arrive to be imported
3. Shared data cross-border, with exchange of information
The EU VAT system works by exchange of information. The tax-registered companies issue invoices and travel papers for the goods to be exported across borders within the EU. The VAT returns in the export and import countries can be reconciled using exchange of information to check the correct tax is declared and paid.
This avoids the need for a hard border within the EU Free zone.
Even so, border checks still occur routinely for illicit, undeclared goods.
The UK have asked the EU to continue exchange of information on trade for VAT, to allow borderless and frictionless trade to continue.
This principle has now been accepted with the trading concession for Northern Ireland to allow a border by exchange of information, rather than a hard border.
CUSTOM MADE
VAT is a sales tax. Customs are a different additional tax. The EU Customs Union is a free trade zone.
Customs Duty is an additional tax only applied to imports from outside the EU.
So imported goods from outside the EU are charged with the added VAT sales tax, and an EU Customs Duty tariff.
It could be argued that the EU is a partially tax free trade zone. The ‘high’ standards and regulations have to be paid for.
This issue is at the heart of USA grievance. Generally the USA didn’t apply tariffs to imports, they accepted goods as a free trade area. When a USA-based company trades with the EU, the USA company has EU customs tariffs applied to its exports to the EU, while the EU company generally has no customs tariff applied to its goods imported into the USA.
This is an EU red line for Brexit and for trade negotiations seeking to protect the integrity of the EU free trade zone. It also puts the EU in the spotlight with the USA to create a level playing field for imports and exports.
Under the agreed withdrawal Treaty, the UK would completely leave the EU Customs Union so that all UK exports into the EU will incur the EU tariffs on trade.
Checks are likely to be no more or no less than they are at the current time. Paperwork and customs declarations should ensure borders run smoothly. The EU internal custom borders already exist: they become physical only if the EU insists on physical checks at the border rather than exchange of information.
It appears the EU and UK have agreed to exchange information.
WITHDRAWAL DEAL BECOMES A TREATY
The Withdrawal Treaty has been agreed and signed off by the UK government, EU Commission and EU Summit of leaders.
As an international treaty, if the Treaty is ratified by the UK and EU government then it becomes international law, and cannot be changed by either side.
If both parliaments vote to accept the Treaty, then it will become law internationally and in the UK.
If not accepted then Brexit with no deal will happen on 31st October.
Only the EU summit of 27 leaders can unanimously vote to grant this exemption. One absence, abstention, or objection, at an additional EU summit of leaders meeting before 31/10/19 could prevent any extension.
Suddenly No Deal looks a clear choice for the UK parliament - Deal or No Deal.
EXPATS CERTAINTIES
Expat family and businesses will gain clarity with a Withdrawal Treaty in place.
Businesses have a clear evolutionary change of process that allows them to continue to export and import in the EU and around the world.
Customs Tariffs may be applied to Exports to and from the EU.
Customs Tariffs from Countries around the world like Japan, China and USA could disappear or change.
The transitional period is secured with the Withdrawal Treaty, allowing Expats time to adapt and update their residency, medical, business, property and tax arrangements until the end of December 2020.
EU expats will have until 6 months after the transition period to secure settled status. UK expats could still relocate as EU citizens until the end of 2020.
Finally Healthcare arrangements for S1 holders don’t drop off at the end of this month, allowing time for new reciprocal arrangements to be made.
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