Frankly, the UK cannot afford a crash-out Brexit

Vat is an invisible tax for most of us. It’s built into the price of almost everything we pay for — clothing, fuel, and some foodstuffs along with many services, writes Brian Keegan

It’s a tax that is full of inconsistencies and anomalies. Vat is charged on a can of iced tea at 23%. Have a cup of tea in a café and the Vat rate is 13.5%. But when you buy tea bags in the supermarket, no Vat is included in the price.

The Vat rates which apply are based on classification — whether something is processed or unprocessed, served hot or cold, or even whether something is a biscuit or a cake.

Vat is an important source of revenue for the exchequer and amounts to about a quarter of all tax collected in this country. It’s also a policing device — a way of ensuring that goods and services bought within the EU are treated more favourably than goods and services coming from outside the EU.

Several problems began to emerge after the Brexit referendum as the penny dropped on just how much had to change. It began to dawn on people that they might not be able to travel between Britain and the rest of Europe as easily as before. People began to worry about licenses for pharmaceuticals and there have been reports of stockpiling in the UK in recent months. Many of these concerns are still not fully resolved as the clock runs down to the March 29 exit date.

Vat also came more into focus after the Brexit referendum because of its role in protecting the European single market. Normally, businesses have to account for the Vat they charge their customers when a product is sold. However, for goods coming in from outside the EU, Vat has to be accounted for as the item is imported rather than when it is sold. That up-front cost to Irish business importing goods from the UK could be as much as €600m every two months. Granted, this €600m could ultimately be charged to customers and recovered, but that squeeze on business cash flow would push many importers out of their current markets. Cash flow problems kill businesses much faster than losses. Both the UK government and the Irish government have now clarified that they will waive this upfront Vat cost on importation in the event that the UK leaves the EU without a deal.

The Irish Government included the move in last week’s Brexit Omnibus Bill. While this is good news, the  oncession may only mask a deeper concern. How will Brexit affect the actual transport of goods into the EU from Britain after March 29? Briefings from the UK revenue authority HMRC in recent weeks suggest that there could be far more problems on goods moving between the UK and the EU than just accounting for Vat.

That includes Irish exports using the UK as a landbridge to continental Europe. It is a clear priority of the UK authorities to keep the roll-on, roll-off movement of goods through key ports such as Holyhead, Dover and the Channel Tunnel flowing freely.

However, this aspiration is entirely dependent on the accurate completion by exporters of all the necessary customs and Vat paperwork and other permissions, before their lorries present themselves at UK ports.

Furthermore, the HMRC plans do not deal with cross border trade on the island of Ireland at all.

Quite frankly, the UK is not ready for a hard Brexit on March 29 and if there is indeed no deal by then, imports and exports to and from the UK will grind to a halt. Whether this reality has landed with all politicians in Westminster is still unclear, but the threat to UK industry is very real.

Taxes like Vat are used to police the EU borders. And as any ordinary taxpayer knows, it’s very hard to get around tax rules, no matter what the reason.

- Brian Keegan is director of public policy and taxation at Chartered Accountants Ireland

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