News & Comment

PREPARING FOR BREXIT – WHO WILL IT BENEFIT?

 

Although our actual exit from the EU is still probably some 30 – 36 months away it’s worth starting to think now about the implications for small businesses and to look for opportunities that might present. VAT is one area where leaving is almost certain to impact – the whole VAT concept is an EU idea, although individual countries have a certain amount of freedom to set their own VAT rates. The EU requires all member states to have VAT as one of their methods of tax collection, so that it can levy a proportion of the VAT tax take as part of each nation’s contribution to the EU budget.

 

When the UK leaves the EU no doubt it will want to have some form of sales tax in place of VAT. But we will be free to set our own rules as to how that sales tax is supposed to work.

 

So consider the following scenario. A small business in the UK imports linen products such as towels and bed sheets etc from a supplier in Hungary and sells them on to end users in this country. The rate of VAT in Hungary for this type of product is 27% whereas in the UK it is only 20%. The Hungarian supplier is allowed to invoice the UK importer without adding VAT on as long as he knows VAT is going to be collected in the UK. In order for the Hungarian authorities to be satisfied this is all above board the supplier needs to be able to provide them with the VAT registration number of the UK importer.

 

Whilst it’s clearly preferable to pay VAT at a rate of 20% instead of 27% our British importer only has a turnover of about £70,000 and therefore strictly speaking his is a voluntary VAT registration. However being VAT registered in the UK means that his customers (who are mostly private individuals and therefore have no means of recovering VAT themselves) end up having to pay VAT on the supplies they receive from the importer.

 

When the UK leaves the EU the Hungarian supplier will be able to provide the goods to the importer without adding VAT on anyway because he is now making supplies to a customer based outside of the EU. The need for him to satisfy the Hungarian authorities that VAT is being levied on the goods in the UK falls away. Our importer can now de-register from VAT and the price the end consumer has to pay drops by 16.67% !

 

Granted there are bound to be downsides to the new circumstances – there will probably be some new form of sales tax in the UK to replace VAT and the importer might have import duties to pay which he will probably have to pass on to the customer. But potentially there is a saving to be made which could be shared between all three parties – the cost to the end user is less, the importer gets to keep a greater slice as profits, and he can afford to offer more generous terms to his Hungarian supplier.

 

If you would like to know more about whether or not your business is going to be effected by the UK’s exit from the EU keep watching this space for further articles.