Indirect tax                                                      

One important part of the UK’s Brexit negotiations will be dealing with indirect tax. Businesses need to consider some of the actions they can take now to help prepare for the UK’s exit from the EU.

Participating in the reform process

We anticipate there will be a flurry of important consultations on the reform of the UK’s indirect tax system over the next two years. Businesses that do not participate in these consultations will lose a unique opportunity to help shape the tax system. The challenge for businesses is to decide which consultations to participate in and what reforms they should request.

It is critical that businesses make the most of the opportunity afforded by the forthcoming indirect tax reforms; failure to effectively communicate will be a lost opportunity. With this in mind, we have already helped businesses conduct an audit of their VAT compliance and tax burden to help understand and prioritise their policy objectives. In our experience this is a critical first step as part of a communications strategy for government, trade associations and other stakeholders.

It goes without saying that most businesses will press the government for a lower tax rate. However, there are in fact a number of important matters to consider.

  • If businesses wish to ask for a reduction in the headline rate of VAT, it is important to consider how the organisation (and the wider economy) would benefit from this. Would this VAT reduction lead to increased capital investment, recruiting more employees or would it bolster profits to ensure the business remains a going concern.
  • What compliance obligations are particularly onerous and should be removed? Why?
  • Conversely, what features of the current regime would businesses like to retain? Are there any simplifications which have proved effective in reducing compliance costs?

Supply chain reorganisation and price

While it is possible that the UK will negotiate the terms of a free trade agreement with the EU, trade with the EU and other countries will be affected by the UK’s departure from the EU. RSM can help businesses learn the lessons from non-EU countries that trade with the EU.

By examining the practical effects of similar agreements the EU has negotiated with Norway, Switzerland and Turkey amongst others, we can begin to predict and plan for the outcome of these agreements and importantly what impact these agreements will have on UK businesses. For example, in addition to the re-imposition of customs formalities for EU trade potentially delaying the delivery of goods we may see increased compliance costs arising from rules concerning the origin of goods being sent to the EU.

Businesses that buy goods from outside the EU and sell to customers in the EU will face the greatest changes. These businesses should start to consider the practical measures required to prepare their business for these changes. This may include a change in their supply chain and adjustments to the price they negotiate with customers and suppliers to reflect their increased compliance burden (or to ameliorate the effect of these changes).

Leaving the VAT union

If the UK’s negotiation with the EU sees the end of the UK’s participation in the VAT union, some VAT simplifications will be lost. Businesses relying on these simplifications must begin to think about their options for the future.

As a member of the EU’s VAT union, businesses benefit from a number of simplifications designed to facilitate intra-EU trade. Some of the more important simplifications are mentioned below.

  • EU-based service suppliers - UK businesses may be asked to pay EU VAT on some services they receive from EU members in the future
  • Recovering EU VAT – the process for recovering EU VAT incurred on costs is slower and more complex than the electronic system currently available. Businesses should begin to think about how to respond to this by either reducing the value EU VAT incurred or plan for a change in the cash flow arising from these claims.
  • Online retailers - businesses selling goods from the UK to EU consumers will no longer be able to rely on the VAT distance selling rules. Instead, consignments must be cleared on entering the EU and in some cases VAT and duty may be demanded from consumers as a condition of delivery, detracting from the customer experience.
  • Services to EU consumers - many UK businesses serving customers in the EU pay EU VAT using a Mini One Stop Shop registration. If we leave the VAT union these businesses will have to register for VAT in at least one and possibly more EU countries. RSM’s European member firms have years of experience in this field and they can provide insights into this process and what businesses can expect.

If you would like any further information on this, please get in touch with Philip Munn or your usual RSM contact.