Something (Posted by a person who knows these things) for those who want to understand the tax implications of leaving the EU:
A few people have asked me to post this separately so they can use this to explain what is going to happen if we leave the SM/CU. I am a former VAT officer and worked for HMRC so understand how this all works – not that being an expert on a subject counts for much with Leavers but this will be the cold hard reality of life for Brexit UK. Apologies for the length but it is going to be fairly thorough although I am not going to discuss services as that is far more complex (!!). 🙂
So let us start with the difference between the SM and Customs Union. What does it actually mean? The single market means we are all essentially considered to be within one economic trading area so our goods can be sold in the SM countries without them being considered imports. This means goods can be shipped direct with no paperwork, delays at borders, import tariffs charged on them so makes us as equally competitive with businesses in other countries.
The way that VAT works on sales in the SM is that a seller in Country A can zero rate the sale if the customer is VAT registered in Country B. The customer in Country B declares the VAT on his return at the rate applicable in their country and pays it over but also claims it back so it’s essentially a nil transaction.
I hear the cry of pointless EU bureaucracy coming so why bother doing a nil transaction? Well it provides the trade statistics (which is how come we know 50% of our goods coming in are from the EU) and it levels the playing field for everyone.
Countries across the EU can set their own VAT rates and the UK has one of the higher VAT rates which would potentially make us uncompetitive against a company that operated in Country C with a 15% VAT rate. By doing it this way, there is no financial advantage in using the supplier from Country C with the lower tax rate over one already in the UK. VAT law allows organisations to claim VAT they incur in the costs of their business so while they pay it over they are still entitled to claim it back. This is no different from one UK company declaring the VAT to HMRC on their return and their UK client claims it back on theirs – just in the case of EU sales it is declared and claimed by the same business. But it means we can export as competitively as any business can operate in any SM state. Neither business incurs a VAT liability they would not have under normal trading rules with companies in their own country – it is there to ensure the market is open to everyone.
The customs union makes import tariffs standard across all member states so no country can undercut another and cause major trade wars so again levels our playing field. Our economic success and that of a lot of other countries has been with the removal of unnecessary bureaucracy, importation delays and operating on what is an equal playing field by joining the SM/CU.
Norway was spouted as a viable alternative model. Norway is in the SM but not the CU. What that means is that Norway can set its own tariff rates on the goods it imports. Their tariffs are high hence prices are high and Norway is one of the most expensive places to live or visit in Europe (never sure why Leavers figured that was a good model tbh without twigging it would make living here more expensive!!). Because they are not in the CU, there are limitations on the goods they sell as part of the SM. They have to prove that any goods sold on the SM are of Norwegian origin (so this model would mean more bureaucracy for businesses which means more cost). And they cannot sell farm or fish products without charging VAT/duty on them which disadvantages them in those industries. If we try and hold out for similar it is likely the EU could exclude some of our industries too.
So what happens post Brexit to the UK? Well goods we bring in as part of the SM will now become imports. Imports are often subject to duty and VAT. So for the 50% of goods we bring in freely without border delays and tariffs, it means these will become more expensive as well as likely be delayed in delivery.
So Company A in the UK buys something worth £100 from Company B in Germany. The German company zero rate it as an export. The item is shipped and then gets held in Customs to check and collect any duty and/or tax due – I do hope Brexiters don’t use Amazon Primes next day delivery as it’s likely to go to “Next week” delivery assuming you don’t want to pay for expedited customs processing. So assuming the duty is 30% and VAT is applicable at 20% the total amount payable will become £156 (VAT is always included on the duty inclusive price so 20% of £130). A UK company will be able to claim the £26 VAT but will be saddled with the £30 duty cost which they will pass on. If you are an individual and no VAT registration or it’s not for your business, you get saddled with the full £56.
And that works the other way too. Our goods may be zero rated for export but the EU will apply a tariff to it. So goods which are bought for £100 from UK Company A will now become £30 more expensive in the same scenario to Company B in Germany.
Obviously you have to factor in the currency situation. Assume a starting point of £1 = €1 situation so £100 = €100. If the pound weakens and it becomes £1 = €0.5 (so for Brexiters that is £2 = €1 😉 :p lol). Previously something we import in that was €100 and we paid £100 for will now cost us £200. For exports £100 will now cost €50 rather than the €100 so a weak pound is good for exports but crap for us buying our shopping. If the pound strengthens to say £1 = €2 then our imports will become cheaper – it will now cost us £50 to import €100 of goods. But to export £100 of goods it will now cost €200. This is just the basic maths & economics (and current UK import/export law) and the cold hard reality why we are not going to do so well with a crashing pound but it may temporarily not appear to be as bad as project fear suggested – our exports will take some of the sting but it won’t remove the duty issue that is coming.
This is why I found the whole leaver comments about them needing us more than we need them delusional. Whoever said price rises weren’t going to happen, was lying – this is how the import/export system works. To be competitive we need to rely on a weak pound for our exports but it means our imports (from everywhere not just the EU) become much more expensive. The duty and VAT will be a double whammy so while we are seeing price rises from a falling pound right now, the worst is yet to come. The way round it is the government drop tariff rates (like that will happen) which will start a trade war with the EU and they can retaliate to raise theirs for our goods. It is absolutely insane to think we can win a trade war with 27 countries who will already be working on the principle that the value of trade will drop because we cannot afford to import so much. They will also be looking for other EU suppliers who will be much more competitive than our companies will be exporting goods.
The duty issue is why May wants tariff free trade deals but the problem there is that India and now Australia are starting to want visas and immigration rights as part of those deals. So they can bleat about controlling immigration but a lot of countries can now use that and visas as a bargaining tool given May will desperately need these deals to keep her Brexshit dream alive. And what Trump wants is anyone’s guess but I think May is going to pretend she is getting what she wants but is unlikely to. Tried to simplify as far as possible and hopefully that helps explain what is the reality of leaving the SM/CU for us.