Businesses across the UK are struggling to get to grips with new post-Brexit VAT rules that are adding billions of pound to operating cost and could send many smaller businesses to the wall.
New rules mean goods shipped to EU countries are now liable for VAT when they enter the single market. Tax experts VAT IT estimate the levies could add £34bn ($47m) to the cost of UK trade with the EU.
Darren Jones MP, chair of parliament’s business select committee, told Yahoo Finance UK the increased costs were a “kick in the teeth” for businesses and urged the government to urgently intervene in the matter.
“The government need to lead on getting these issues resolved urgently and explain to businesses how they are going to help them prosper in the future,” he said.
The VAT changes have caught many businesses flat footed and, combined with the impact of COVID-19, could sink thousands.
“The double whammy of COVID and Brexit — certain businesses may not exist in a couple of months time,” Selwyn Stein, managing director of tax reclamation specialists VAT IT, told Yahoo Finance UK.
The VAT changes are part of a raft of new arrangements that came into force from 1 January when the Brexit transition period ended. The new rules lead to a direct and significant increase in costs. Companies face an average VAT rate of 20% on goods shipped into the EU and the levy is as high as 27% in some countries.
“We’ve had to speak to companies that can’t even pay the smallest fee to us because their margins are so small,” Stein said. “What the VAT charges are going to do to those businesses is eradicate any profit that they can make at the moment. It’s a precarious position they find themselves in.”
Stuart Parrish, director of Northampton-based shoe maker John White, said his business had lost money on a recent order sent to the EU. Parrish fears the new VAT rules could make shipping to the Europe unviable. He has struggled to find clear guidance on how the new rules will affect his business.
“I have found it very tricky to speak to the right person,” he told Yahoo Finance UK. “We run a website and we need our customers to be aware of what monies they’re getting involved. You can’t charge them £100 and then say I need a further £30. That’s actually what happened last week.”
James Warwick, the founder of Illuminati Vodka, said he had been forced to shift production of his spirit from Poland to England as a result of the new VAT changes. The shift has added £1 to the cost of producing each bottle — an increase of around 15% — but is still cheaper than the costs associated with shipping from Poland.
“My customer is the nightclub,” Warwick told Yahoo Finance UK. “I’ve got to be very competitive for them to want to have me. I’m taking the cost on myself, which is lowering my profit.”
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The Spanish city of Marbella is also one of Illuminati Vodka’s biggest overseas markets and shifting production to Britain means exports there will face VAT.
“We are going to have to start exporting from the UK back into Spain,” he said. “There will be issues with that.”
While VAT can often be reclaimed after the fact, businesses must pay it up front which hugely increases operating costs in many cases.
“The average SME that we’re looking to support moves around £400,000 of goods a year into Europe,” Stein said. “If you now all of a sudden have to get hit with a 20% charge — that’s a lot of money. How do you cater for that in your profit margin? How do you remain competitive and still make money?”
UK prime minister Boris Johnson claimed the tariff and quota free trade deal struck with the EU on Christmas Eve would not create any non-tariff barriers to trade. However, VAT charges and a raft of new paperwork have shown that to be untrue. Businesses face the prospect of filling in an estimated 220m extra forms to continue cross-border trade.
Stein said VAT was “quickly becoming the most obvious” issue with the new regime.
“As we started getting closer to Brexit we were probably talking to 30, 40, 50 companies a week,” he said. “At the moment that’s up to 150, 200 companies and continuing to grow because it’s becoming a real problem — they’re getting stuck at the border and they’re getting an invoice.”
Parrish said he had considered stopping trade with the EU as a result of the changes but needed the business. Larger companies ranging from DPD to Debenhams have paused trade with Europe while they adjust to the new rules. The government has said these are “teething problems.”
“The government’s dismissal of these issues as ‘teething problems’ will be of little consolation to those businesses at the coal-face, grappling with the impact of additional red-tape and clobbered by a hike in their costs,” Labour MP Jones told Yahoo Finance UK.
Stein said: “It’s easy to guise it as a teething problem. Perhaps there won’t be as many delays over time at the border in Dover and Calais as systems improve and processes improve. But what those systems and processes don’t do is do away with the necessity to comply with a set of rules and regulations.
“I do think it will set British businesses back, at least in the short term.”
Businesses face fines of up to 5% of the value of goods shipped if paperwork is filled in wrong. Goods can also be held at the border if VAT is not paid.
“All of these things, ultimately, result in a lack of competitiveness for British businesses,” Stein said.
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