Tag Archives: vat-free

VAT: What’s a TOGC (and what’s not)? – The General Distribution Storage case

By Marcus Ward 7 October 2019

Latest from the courts

A Transfer of a Going Concern (TOGC) is an area of VAT which produces a lot of issues and is a subject which is returned to on a regular basis in the courts. The General Distribution Storage Ltd (GDSL) First Tier Tribunal (FTT) TC 07352 [2019] case provides a warning that getting it wrong can be costly.

Background

The appellant owned the freehold of a commercial property. This property was rented to a third party. Subsequently, the property was sold with the benefit of the existing lease, to Hartlone Scaffolding Ltd (HSL). Output tax was charged and paid on the value of the sale as the property was subject to an option to tax. HSL also opted to tax before the date of completion. On the same day, HSL sold on the property to Foundry Investments Ltd (FIL) and again, VAT was charged and paid.

FIL made a claim for the input tax charged which caused a pre-credibility enquiry from HMRC. During the inspection, HMRC noted that, although GDSL had charged VAT, it had neither declared, nor paid the VAT to HMRC. An assessment was issued to recover this output tax.

The appellant claimed that no VAT was due because the sale of the tenanted building qualified as a VAT free TOGC, ie; it was not a taxable sale of an opted commercial property, but rather, it was the sale of a property letting business which was a going concern.

Technical

TOGC provisions

Normally the sale of the assets of a VAT registered business will be subject to VAT at the appropriate rate. A TOGC, however is the sale of a business including assets which must be treated as a matter of law, as “neither a supply of goods nor a supply of services” by virtue of meeting certain conditions (summarised below). It is always the seller who is responsible for applying the correct VAT treatment. Transfer Of a Going Concern treatment is not optional. A sale is either a TOGC or it isn’t. It is a rare situation in that the VAT treatment depends on; what the purchaser’s intentions are, what the seller is told, and what the purchaser actually does. All this being outside the seller’s control. Full details of TOGCs here.

TOGC Conditions

The conditions for VAT free treatment of a TOGC:

The assets must be sold as a business, or part of a business, as a going concern
The assets must be used by the transferee in carrying on the same kind of business, whether or not as part of any existing business, as that carried on by the transferor in relation to that part (HMRC guidance uses the words “intend to use…” which, in some cases may provide additional comfort)
There must be no break in trading
Where the seller is a taxable person (VAT registered) the purchaser must be a taxable person already or immediately become, as a result of the transfer, a taxable person
Where only part of a business is sold it must be capable of separate operation
There must not be a series of immediately consecutive transfers

Where the transfer includes property which is standard-rated, either because the seller has opted to tax it or because it is a ‘new’ or uncompleted commercial building the purchaser must opt to tax the property and notify this to HMRC no later than the date of the supply.

Please note that the above list has been compiled for this article from; the legislation, HMRC guidance and case law. Specific advice must be sought.

Decision

It was decided that TOGC could not apply in these circumstances. The buyer, HSL, at the time of the sale, could not have intended to carry on the property letting business as it immediately sold on the freehold (at a profit) on the same day. As above, TOGC treatment does not apply if there is a “series of immediately consecutive transfers”. The appeal was consequently dismissed, and output tax was therefore properly due.

Commentary

This appears to have been the only available conclusion. It illustrates the importance of considering VAT whenever a supply of property is made. It is unclear why VAT was initially charged and why this was not declared to HMRC (and it if was thought a TOGC, why the VAT position was not subsequently corrected by the issue of a VAT only credit note). This is a complex area of the tax and an easy issue to miss when there are a considerable number of other factors to consider when a business (or property) is sold. Extensive case law (example here and changes to HMRC policy here ) insists that there is often a dichotomy between a commercial interpretation of a going concern and HMRC’s view.

Contracts are important in most TOGC cases, so it really pays to review them from a VAT perspective.

I very strongly advise that specialist advice is obtained in cases where a business, or property is sold. Yes, I know I would say that!

VAT: Apportionment and best judgement – The Homsub case

By Marcus Ward 3 October 2019

Latest from the courts

In the Homsub Ltd case the issue was the apportionment of values when a supply comprises goods at different VAT rates.

Further to the M & S case here is another First Tier Tribunal (FTT) case on the value of food and drink in meal deals. It also considered whether HMRC exercised ‘best judgement’ when it carried out an invigilation exercise to establish the percentage split between supplies subject to VAT and those which were not.

Background

Homsub is a franchisee in respect of Subway products, essentially being hot and cold food, which can be consumed either on or off their premises.

HMRC had concerns that the correct amount of output tax was being declared on sales. Consequently, it carried out an invigilation exercise as follows: The invigilators recorded, in respect of each of the five outlets, each sale made and annotated it with whether it was eat in or take out. A record was also made as to whether the food was hot or cold. Those differences needed to be recorded because of the different VAT treatment in respect of hot food and cold food on the one hand and eat in and take out food on the other. All eat in food is taxable, while some takeaways are zero rated. Further information here.

Contentions

Homsub complained that the methodology adopted by HMRC was flawed as it was not sufficiently refined to give rise to a reasonably reliable overall picture. It was argued that the exercise should have been undertaken by reference to transaction values, rather than the number of transactions. That is – HMRC should have looked at the value of supplies made which did attract VAT as compared to the value of supplies made which did not attract VAT.

The court identified that the true area of concern on the part of the respondents was that Subway sometimes had promotions called “Meal Deals” whereby several products would be bundled together for a single headline price.

Homsub contended that a meal deal offer was available to customers whereby for the all in price of £3 a customer could purchase a sandwich (hot or cold) and a drink (which could be a fizzy drink or hot beverage upon which VAT would be due). If the meal deal involved hot food, then it would be subject to VAT.

HMRC’s issue was that because of the way in which the appellant’s till was set up, it treated £2.99 of each meal deal as attributable to the sandwich (VAT free if cold) and only 1p to the accompanying drink which, if subject to VAT, would mean that the VAT would be one fifth of one penny.

Outcomes

Homsub stated that it is entitled to run its business as it sees fit and to make such commercial decisions as best suit its business. The appellant said that it is entitled to sell loss leaders, as do many major retailers, or to sell stock at less than cost price if that somehow serves the best overall commercial interests of the business.

The court ruled that this was not a true loss leader situation. This was a transaction were goods are packaged together to be sold at a single price. What must be done is to look at the reality of the transaction when apportioning the part of the money paid by the customer between the various components within the package of goods sold. Consequently, Homsub needed to apportion the sales value in a different way. This would not necessarily be on the basis of the relevant retail prices. This is because accurate apportionment is difficult, especially as, as Homsub explained, that labour is by far the largest cost component within the cost of a sandwich and the overall meal deal package, that is; much more staff labour was devoted to preparing sandwiches than serving drinks.

If the case stopped there, there would be additional output tax for Homsub to pay. However…

Methodology and best judgement

The court decided that the assessment methodology adopted by HMRC was significantly flawed and potentially misleading. A simple count of transactions that did attract VAT and those which did not attract VAT might be capable of being appropriate in certain kinds of business, but not in this case. Further, a statistician or forensic accountant would be ‘alarmed to find that the methodology used by HMRC was considered to be either acceptable or such as to give rise to a reasonably reliable result’. In court, the representative of HMRC was forced to agree with this interpretation- which must have caused embarrassment. The court also said that it was not its function to go on to undertake any kind of assessment to ascertain what, if any, additional VAT might be due.

Decision

In the court’s judgement the methodology was flawed to such an extent that it would be wholly unreasonable, and unfair to the appellant, to base a best judgement assessment thereon. The appeal was therefore allowed.

Commentary

Always have assessments of this sort reviewed. There is significant case law on ‘best judgement’ most salient being: Van Boeckel v C&E [1981] and Rahman v HMRC. Additionally, HMRC often make certain assumptions on assessments based on invigilation and mark up exercises. These can be challenged, as can the methodology. As examples, HMRC need to recognise, inter alia;

seasonal trade variations
discounts
customer preferences (in this case, Homsub explained that at some of its shops’ locations a lot of customers were students and preferred to take away rather than eating in)
representative periods
sales/special offers
the times invigilations were carried out (were they representative of all trade?)
the number of invigilations and ‘test meals’ – were they sufficient to establish a fair overall picture of the business?
own and staff use
business promotions
loss of goods (destroyed, waste, stolen etc)
gross/net
gifts to customers
alternative methods
HMRC staff experience etc

All of these and other situations can affect expected sale values.

I have further set out how HMRC operate in these situations here.

I have a success rate of over 90% in getting these types of assessments reduced or completely withdrawn. Please do not simply accept HMRC’s decision, nor the, increasingly, bullying stance they can adopt. Always challenge!

VAT: Extent of welfare exemption – The Lilias Graham Trust case

By Marcus Ward 3 October 2019

Latest from the courts

Certain welfare services are exempt from VAT via VAT Act 1994, Schedule 9, Group 7, Item 9 – services which are directly connected with the care or protection of children. In the The Lilias Graham Trust (LGT) First Tier Tribunal case, the scope of the exemption was considered.

Background

LGT, which has charitable status, operated residential assessment centres, which supported parents (many of whom had mental health issues) in learning how to care for their children.

It was common ground that LGT’s services were as summarised in a letter from Glasgow City Council (where relevant):

LGT is an assessment centre providing assessment services on the parenting capacity of those referred to the service
The assessment services cover families where there is an uncertainty about whether the parent(s) can safely look after their children
LGT is simply acting as an observer watching the parent’s care for their own children and providing information in the form of advice
LGT is not providing any treatment in the form of medical care for any illness or injury
LGT’s recommendation following the assessment provides a recommendation to social workers around whether the parent(s) has sufficient capacity to keep their child safe and healthy
GCC viewed the residential accommodation as a fundamental part of the provision of the assessment services on the parenting capacity of those families which were referred to LGT.

Although the major part of LGT’s income came from the Local Authority fees, it is also subsidised to a degree by grants and donations.

Technical

In this case the odd position was that HMRC was arguing for exemption because, in learning how to care for their children, the services were “closely linked” to welfare services or “directly connected” to them as provided for by the Principal VAT Directive and the VAT Act in turn.

LGT contended that their supplies to a Local Authority (which could recover any VAT charged) were taxable as they did not fall within the welfare definition. LGT admitted that there was a causal relationship between the services provided and the care and protection of children, but the connection was too remote to be deemed to be a direct connection – There were several intervening factors and intermediaries between the service provided and the care and protection of children.

At issue was net input tax of circa £400,000 which would be recoverable by LGT if its supplies were taxable, but not if they were exempt. Guide to partial exemption here.

Decision

The court found that the essential purpose of the supplies made by LGT was to ensure that the child was better cared for and had optimal protection. That is precisely why the Local Authority employed LGT. Its supplies are both closely linked and directly connected with the protection of children as also to their care. Accordingly, the appellant made supplies of welfare services which are exempt from VAT. The fact that LGT provided its services to the Local Authority rather than the parents did not mean that its services should be taxable. Therefore, there was no output tax chargeable to the Local Authority and no input tax recovery by LGT on expenditure attributable to those exempt supplies.

Commentary

In this case, HMRC originally ruled that the services were taxable and LGT were required to VAT register, it even issued a late registration penalty. HMRC clearly subsequently changed its view which put input tax which LGT had recovered at risk. There are often disputes on the extent of the exemption, and sometimes debates on whether a service is supplied, or simply staff providing their services. It is important to understand these sometimes subtle differences as getting it wrong can be costly, as LGT found out.

VAT: Disaggregation – The Caton case

By Marcus Ward 12 September 2019

Latest from the courts.

In the Charles John Caton First Tier tribunal (FTT) case the issue was whether HMRC were correct in deciding that a business was artificially split to avoid VAT registration (so called disaggregation, details here).

Background

The appellant ran a café known as The Commonwealth for a number of years. Subsequently, his wife opened a restaurant in adjoining premises. HMRC decided that this was a single business and required a backdated VAT registration. This resulted in a retrospective VAT return and associated penalties for late registration.

HMRC pointed to the leases, the liability insurance and the alcohol licence, which are all in Mr Caton’s name, together with the fact he signed a questionnaire stating that he was sole proprietor of the restaurant, and the fact that the washing up area is shared, and say that these show that there was only one business. They also said that the fact that Mrs Caton did not have a bank account and therefore card takings from the restaurant went into Mr Caton’s bank account further bolsters their case.

The appellant proffered the following facts to support the contention that there were two separate businesses: There were separate staff in the restaurant and the café. Those for the cafe were hired by Mr Caton, and are his responsibility, and those for the restaurant were hired by Mrs Caton and are her responsibility. The cooking is done completely separately, by different people using different cooking areas. The menus are completely different, and when the café sells the restaurant ‘specials’ they are rung up on the till with a marker that shows they are restaurant sales. Although the majority of the food is ordered from the same place, there are separate orders (even though these orders are placed at the same time and paid for using Mr Caton’s bank account). Mrs Caton decides on the menu for the restaurant and the prices. She keeps the cash generated from the sales in the cafe, and this is not banked in Mr Caton’s account. Depending on the ratio of cash sales to card sales in any given month, she may need to pay some of it to Mr Caton for the rent, rates etc, but any surplus she keeps.There were two tills, one for the restaurant and one for the cafe.

The Law

The VAT Act 1994, Schedule 1 para 1A provides that:

(1) Paragraph 2 below is for the purpose of preventing the maintenance or creation of any artificial separation of business activities carried on by two or more persons from resulting in an avoidance of VAT.

(2) In determining for the purposes of sub-paragraph (1) above whether any separation of business activities is artificial, regard shall be had to the extent to which the different persons carrying on those activities are closely bound to one another by financial, economic and organisational links.

VAT Act 1994, Schedule 1 para 2 provides that:

(1)… if the Commissioners make a direction under this paragraph, the persons named in the direction shall be treated as a single taxable person carrying on the activities of a business described in the direction…

Decision

The judge decided that she considered the facts that point to the businesses being run and owned as two separate operations were significantly stronger that facts that point to a joint ownership. And the appeal was allowed.

Commentary

These types of cases are decided on the precise facts. I think that this one must have been a close call. It appears the fact that may have swung it was that the judge commented “We find it extremely surprising, in this case, that HMRC have never met with Mrs Caton or, in correspondence, asked her for any details. Mr Caton and HMRC have both told us that he has consistently maintained from the first meeting the fact that Mrs Caton runs the restaurant. We find it impossible that HMRC could be in possession of facts sufficient to make a reasonable decision on this case without hearing from Mrs Caton.” That approach by HMRC is never going to play well in court. It strikes me that this type of approach is increasing in the department. Whether this is down to lack of training, resources or simple corner cutting to save time I cannot say.

If HMRC issue a direction under VAT Act 1994, Schedule 1 para 2 that two or more businesses should be treated as one, it is always worth having that decision reviewed. This is especially relevant in cases such as this where customers are the final consumers making the VAT sticking tax.

VAT DIY Housebuilders’ Scheme – useful information

By Marcus Ward 9 September 2019

The DIY Housebuilders’ Scheme is a tax refund scheme for people who build, or arrange to have built, a house they intend to live in. It also applies to converting commercial property into a house(s). Details here.

However, there are often uncertainties and disputes over precisely what tax may be claimed on various expenditure. To this end, HMRC has published a comprehensive list of items, sorted alphabetically, which should avoid a lot of potential disagreements on claims.

It should be noted that a claim for services can only be made for conversions (at the reduced rate of 5%) as any services in respect of a new build property should be zero rated.

What else can a housebuilder not claim for?

There is no claim available for:

building projects outside the UK
materials or services that are not subject to VAT, eg; are zero-rated or exempt or provided by a non VAT-registered supplier
professional or supervisory fees, eg; architects and surveyors
the hire of plant, tools and equipment, eg; generators, scaffolding and skips
building materials that aren’t permanently attached to or, part of, the building itself
some fitted furniture, electrical and gas appliances, carpets or garden ornaments
supplies for which you do not have a VAT invoice.

If you would like assistance with making a claim, please contact us.

VAT EU Gap Report

By Marcus Ward 5 September 2019

Mind the gap

EU countries lost €137 billion in VAT revenues in 2017 according to a study released by the EC on 5 September 2019. The VAT Gap has slightly reduced compared to previous years but remains very high.

This gap represents a loss of 11.2% of the total expected VAT revenue.

During 2017, collected VAT revenues increased at a faster rate of 4.1% than the 2.8% increase of VAT Total Tax Liability (VTTL). As a result, the overall VAT Gap in the EU Member States saw a decrease in absolute values of about EUR 8 billion or 11.2% in percentage terms.

Member States in the EU are losing billions of Euros in VAT revenues because of tax fraud and inadequate tax collection systems according to the latest report. The VAT Gap, which is the difference between expected VAT revenues and VAT actually collected, provides an estimate of revenue loss due to tax fraud, tax evasion and tax avoidance, but also due to bankruptcies, financial insolvencies or miscalculations.

In 2017, Member States’ VAT Gaps ranged from 0.6% in Cyprus, 0.7% in Luxembourg, and 1.5% in Sweden to 35.5% in Romania and 33.6% in Greece. Half of EU-28 MS recorded a Gap above 10.1%.

Overall, the VAT Gap as percentage of the VTTL decreased in 25 Member States, with the largest improvements noted in Malta, Poland, and Cyprus and increased in three – namely Greece, Latvia, and Germany.

The variations of VAT Gaps between the Member States reflect the existing differences in terms of; tax compliance, fraud, avoidance, bankruptcies, insolvencies and tax administration. Other circumstances could also have an impact on the size of the VAT Gap such as economic developments and the quality of national statistics.

The UK

In the year 2017, in the UK the VTTL was £158421 millions of which £141590 millions was actually collected. This leaves a VAT gap for the UK of £16831 millions which represents 11% of the amount which is estimated was due to HMRC. About a mid-table performance compared to other Member States.

VAT and Customs Duty: Brexit latest

By Marcus Ward 20 August 2019

HMRC has been issuing guidance in readiness for Brexit, and in particular, a No Deal Brexit.

They generally provide information on preparations and actions required by business that trade cross-border.

Imports

If a business bring goods into the UK from the EU there are actions you should take before and after you’ve imported the goods. This applies to:

importers
freight forwarders
fast parcel operators
customs agents
traders who move their own goods

(This guidance does not apply to moving goods between Ireland and Northern Ireland). A border on the island of Ireland is a whole other matter.

The full guidance for importers.

Exports

Again, this guidance relates to:

exporters
freight forwarders
fast parcel operators
customs agents
traders who move their own goods.

The full guidance for exporters.

Email updates on Brexit

We recommend that business falling within the above definitions sign up the free HMRC Brexit email alert service.

This service covers: information about Brexit including the Article 50 process, negotiations, and announcements about policy changes as a result of Brexit.

It is crucial that businesses understand the impact of a No Deal Brexit and make preparations for all eventualities of the political negotiations. Sign up here

VAT: What is an economic activity? The Pertemps’ case

By Marcus Ward 12 August 2019

Latest from the courts

In the Upper Tribunal (UT) case of Pertemps Limited the issue was whether the operation of the respondent’s salary sacrifice scheme to provide travel and subsistence payments to employees was a supply for VAT purposes and, indeed, whether it was an economic activity at all.

I have considered what is an economic activity (business) many times, examples here, here, here and here. It is a perennial VAT issue and goes to the very heart of the tax. EU legislation talks of economic activity, which is taken to be “business activity” in the UK. There is no legal definition of either economic or business activity so case law on this point is very important.

Background

Employees of the respondent were offered the option of;

being paid a salary, from which they would have to meet any travel and subsistence expenses, or
participating in Pertemps’ scheme where they would be paid their travel and subsistence expenses but receive a reduced salary.

The amount of the reduction was equal to the amount of the expense payment plus a fixed amount to defray the costs of running the scheme. The issue was whether the charge for using the scheme was taxable.

HMRC’s appeal against the FTT decision [2018] UKFTT 369 (TC) was based on the view that the scheme involved a taxable supply of services by Pertemps to its participating employees such that output tax was due of the fixed payments. The FTT concluded that Pertemps did supply services to the employees. but the supply was not within the scope of VAT because the operation of the scheme was not an economic activity. It allowed Pertemps’ appeal. The FTT also held that, if there had been a supply, it would have been exempt.

Decision

The UT decided that, although the FTT erred in law when it concluded that Pertemps made a supply of services to the employees who participated in the scheme, it was correct when it concluded that Pertemps was not carrying on any economic activity when it provided the scheme for employees. The charge only arose in the context of the employment relationship, and it could not be compared to an open market supply of accountancy services.

Therefore, HMRC’s appeal was dismissed.

Commentary

Care should always be taken with salary sacrifice schemes. Some, but not all, sacrifices are subject to output tax. HMRC internal guidance on the subject here. This case is a helpful clarification on the matter of certain charges to staff. It also adds another layer to the age-old issue of what constitutes a business activity. VAT is only due on business supplies, and it is crucial to appreciate what is, and isn’t an economic activity. This is especially important in respect of charities and NFP bodies.

VAT: What are zero rated animal foodstuffs?

By Marcus Ward 12 August 2019

Modelled by Lola. (R) Collar: models’ own

Latest from the courts

The First Tier Tribunal (FTT) case of Westland Horticulture Limited highlights the complexities of; the VAT treatment of food, animal foodstuffs, seeds, crops and how these are all held out for sale. One only has to consider the myriad VAT liabilities of seemingly similar products sold at, say, a garden centre, to realise that this is can be a VAT minefield.

Examples

Food for a budgerigar is standard rated, but pigeon grit is zero rated.
Peanuts and sunflower seeds are zero rated, unless advertised as wild bird food when they are standard rated
Food for a Labrador is standard rated, unless the dog is used as a gun dog when it is zero rated
Lavender seeds are zero rated. Daffodil bulbs are standard rated.

This is a very small list of examples where the VAT treatment of precisely the same product may change depending on use, and/or where a slight difference of the type of goods can have a surprising tax outcome.

A full guide to garden centre liabilities here

The case

HMRC state in Public Notice 701/38 para 5.3

“Most grass seed is zero-rated because of the extensive use of grass as animal feed. This includes supplies to and by garden centres, local authorities and grass seed to be grown on set aside land.

But pre-germinated grass seed and turf are not used for the propagation of animal feed and are therefore standard-rated.”

Zero rating is available per VAT Act 1994, Schedule 8, Group 1, item 3: “…seeds or other means of propagation of plants comprised in animal feeding stuffs”

In Westland’s case, it sold a product called Aftercut Patch Fix, which, although was 90% grass seed, also contained sowing granules and an ingredient called Clinoptilolite which, apparently, neutralises the effects of excess salts and ammonia found in pet urine. The grass seed was of various varieties and is not in itself any different to “ordinary” grass seed sold without any additives.

Having a new puppy, I can verify the damage one small hound can do to lawns and this is a product I may will need to invest in. The product was held out (see below) to help fix damage to grass that, in my case, a small Lola (and larger Libby) can do.

Decision

Unsurprisingly, the judge ruled that the product was standard rated on the grounds (no pun intended) that it was clearly intended to be used on people’s gardens rather than to be planted to grow animal food. Therefore, the zero rating provided via PN 701/38 does not apply.

The Product was physically different to generic grass seed as it contained more than just seed. The product (as distinct from the seed within the product) is therefore not a similar product to generic grass seed for the purposes of fiscal neutrality.

Commentary

A discrete issue you may think. However, the tax in this single case amounted to over half a million pounds. It illustrates how much care must be taken in establishing the correct liability of; food, animal foodstuff, pet food and ornamental versus edible plants, seeds, bulbs, shrubs and trees.

One of the salient tests is how the goods are “held out for sale” (held out)

Held out means the:

way a product is labelled, packaged, displayed, invoiced, advertised or promoted
heading under which the product is listed in a catalogue, web page or price list

In this case, the packaging and description on the appellant’s website was a major factor in the decision.

Manufacturers and retailers may need to review how their products are described, what the contents are and how they are displayed in-store. Even the location of the goods, how they are displayed, and the signage used may affect the VAT treatment (it doesn’t matter if I buy zero rated working dog food and feed it to my two who are never going to do a day’s work in their life….).

VAT: Brexit – Retail Export Scheme benefits

By Marcus Ward 2 August 2019

VAT free shopping for all! Save 20% on anything you buy!

This seems very unlikely I hear you mutter, but, but…..

If you live in the UK after a No Deal Brexit, there is a simple way of never paying VAT on any retail purchases for your own use. From a piano to a gymnasium, from a teapot to a lawnmower – all may be purchased completely VAT free and legally. It does not appear that the Government has considered this, it certainly does not feature in the recent report on the “Alternative Arrangements”. This is especially relevant to the Northern Ireland/Republic of Ireland land border. It may be that if we believe hard enough in Brexit we can avoid UK residents not paying UK VAT…

So how will this fabulous shopping opportunity come into being?

There is an EU-wide system (set out at Article 131 of The Principle VAT Directive) which provides for the recovery of VAT incurred by individuals from outside the EU. Clearly, after a No-Deal Brexit, that will be anyone in the UK. This is called the Retail Export Scheme (RES). After a hard Brexit, any goods moving from an EU Member State into the UK will now be classed as exports (pre-Brexit there is free movement of goods within the EU, so there would be no exports when goods move cross-border within the EU).

How does RES work?

When an individual buys goods in an EU Member State and exports them for his/her personal use, the retailer will charge VAT at the rate applicable in that country. The shop will also issue a certain document. This document is stamped when the goods are physically exported buy the buyer and the customer returns the form to the retailer. It is a quite painless procedure. When this evidence that the goods have been exported is received by the retailer, it will refund the VAT paid – The result = VAT free shopping. Also, the scheme has no minimum sales value.

And after Brexit?

The UK has said its 2017 Customs Bill that VAT will not be charged on personal imports. This is effectively inviting tax free cross-border shopping and consequently, logically, reducing retails sales in the UK. I am sure that that is not what the Government had in mind. It is likely that there could be wide scale use of RES. After all, what is a bit of paperwork and a short drive to save 20%?! This is even before one considers the abuse of the arrangements, which, with the obvious financial benefits, could be significant. A day trip to mainland Europe will be very inviting, and then, there is our land border…

Some politics…

The Irish border

Clearly, the most relevant issue is the Irish border. Regardless of the political noises, there will be a “difference” between EU and “third country” (which the UK will be after a No Deal Brexit) rules between the two countries. These differences facilitate the use of the RES. There is nothing in any proposals which will prevent cross-border shopping on the island of Ireland. I can imagine retailers in Dublin rubbing their hands together while those in Belfast gloomily survey empty shops. Perhaps new retailers will pop up on the Irish side of the EU/UK divide to make matters even more helpful for bargain hunting shoppers from the UK. Another issue which I doubt the UK has considered is that if there is no border (which we are told by the Government will happen even though a No-Deal Brexit will definitively and specifically not permit this) there will be nobody to stamp the forms. I won’t get into the politics of the Good Friday Agreement (GFA) and a No Deal Brexit, but it seems almost certain that there will have to be a deal with the EU to ensure there is no border, OR the UK must renege on the GFA which could bring terrifying consequences to peace in the area, amongst a lot of other issues. What a mess.

Importance of a border with the EU

No two countries outside of the EU have ever removed border checks between themselves. They try to streamline checks where possible, as everybody wants smooth trade, but always retain border checks. Why? Simply, for goods trade, a border post is the only place where you can guarantee to have the vehicle, the items definitely being transported, and all relevant paperwork in one place. You can and do make other checks, but the border is at the core. One of the reasons for the EU legal and regulatory framework is to be able to trust that goods trade between members can take place without border checks. This means common tariffs, common rules, and legal redress. Without being a part of the regulations, there can be no such trust and a hard border is necessary.

Unsurprisingly, there have been no studies on the cost to UK retailers, and apparently, no recognition whatsoever, that this could be a serious issue. Given the political issues with the Irish border, and the serious consequences of going against the GFA, this is another issue which has been either; overlooked, dismissed, politically ignored, or relegated to the bottom of a list of so many issues caused by an ill-considered No Deal Brexit.

What the government has continually, apparently deliberately, failed to recognise is that there is no fudge that provides both freedom from EU rules and frictionless trade with a No Deal Brexit. There is no current way to reconcile Northern Ireland remaining aligned with the UK, Ireland staying fully in the EU, pure Brexit, and no border checks. Tax is simply one area in the commercial world which has been ignored, for political reasons. VAT is just one area of tax, and the RES is just one area of VAT.