With a Brexit deal still out of reach, the UK government has introduced the Taxation (Cross-border Trade) Act 2018 setting out the customs regime for when the UK finally leaves the European Union. We consider its provisions and explain how it fits in with wider legislation.
What is the purpose of the new Act?
The Taxation (Cross-border Trade) Act 2018 (“T(CT)A 2018“) is intended to set up a new customs (import and export duty, as well as excise duty) and Value Added Tax (“VAT“) regime for the United Kingdom, to apply once the UK has left the European Union, although, in the event that a Withdrawal Agreement between the EU and the UK comes into force, the operative provisions of T(CT)A 2018 affecting actual duties and methods of tax collection will not take effect until at earliest 1 January 2020 or whatever other date the transitional period (provided for under the Withdrawal Agreement) comes to an end.
T(CT)A 2018 does not deal in itself with the new long-term trade agreements the UK hopes to make with third countries and customs unions (including the EU). These are the subject of a Trade Bill currently making its way through the UK Parliament. T(CT)A 2018 does, however, make provision for rates of duty, which may be affected by such agreements. It also makes provision (T(CT)A 2018, s.31) for the UK to be part of a customs union with other countries or territories, including the EU, which could be used to deal with the future relationship with the EU.
There are three important consequences of the new law:
- First, insofar as there is directly effective EU law dealing with customs duties or VAT (eg the Union Customs Code Regulation) or there is UK law specifically implementing EU Directives in this field (eg the many EU VAT Directives), which, under the terms of the European Union (Withdrawal) Act 2018 (“EU(W)A 2018“), would be ‘retained EU law’, this body of EU law is (to the extent not dealt with in or under T(CT)A 2018 itself) likely to be heavily amended or repealed by legislation under EU(W)A 2018 so as to establish T(CT)A 2018 and subsidiary legislation under it which will be purely UK law. The only circumstance in which this might not happen would be if arrangements concerning the border between the Republic of Ireland and Northern Ireland result in the UK or part of it remaining in the EU Customs Union for an extended period of time after the end of the transitional period.
- Second, there will—for the first time since 1973—be a customs border between the UK and the EU. Even if there is a free trade area between the EU and the UK so that EU origin goods do not attract customs duty on entering the UK (and vice versa), divergences between the UK and EU trade relations with the rest of the world will mean that goods not of EU origin imported from the EU may attract duty (or a duty rebate) on entering the UK and thus declarations of origin will be required for all goods entering the UK from the EU. If there is not a free trade area between the EU and the UK—for example if the UK crashes out of the EU at end March 2019 without any agreement—duty will be payable on all goods entering the UK from the EU (and vice versa) initially likely to be the same as current EU rates for trade with World Trade Organisation (“WTO“) countries who do not have a free trade agreement with the EU.
- Third, in the absence of contrary agreement with the EU, the VAT regime will require all suppliers into the UK to register for VAT (subject to any de minimis concession), whereas in the recent past suppliers of services and distance sellers within the EU operating below a financial threshold would be able to charge VAT at their domestic rates when supplying UK customers. UK suppliers to the EU will be similarly affected once the UK is outside the EU.
How much is being left to regulations, and how extensive are the regulation-making powers?
As can be seen from the answer to the first question, there are a lot of options about what the future customs regime will be vis-a-vis the EU (as well as third countries with which the UK will make its own free trade agreements) and about the timing of the introduction of the new regime. This requires some significant order-making powers. Over time the UK may also choose to vary its standard WTO tariffs and these sorts of changes would be dealt with by statutory instrument.
T(CT)A 2018 repeals any EU regulation or other directly effective EU law relating to excise duty, subject to potential savings (s. 47) and provides for related legislation up to April 2023, subject to a positive resolution of the House of Commons. Excise duty is not the subject of a fully harmonised tax regime in the EU, but EU law allows dutiable goods (typically alcohol and tobacco) to be tracked as they are transported throughout the EU, paying duty only where they are released for consumption, subject to some derogations for personal imports by consumers. The position will remain that goods released for consumption in the UK will be subject to excise duty at UK rates, but the UK will cease to participate in the EU tracking system unless otherwise agreed.
T(CT)A 2018 also repeals the EU directly effective law relating to VAT subject to savings (s. 42) and provides for related legislation to be made before April 2023, subject to a positive resolution of the House of Commons. The key VAT law, however, is derived from Directives. Although they will cease to be part of UK law when the UK leaves the EU, the UK legislation implementing them will be saved by EU(W)A 2018 and powers to amend or repeal this legislation so far as it may be primary legislation are contained in EU(W)A 2018.
Finally, T(CT)A 2018 also repeals direct EU legislation imposing or relating to customs duty (Schedule 1, Part 1, para 1).
In addition to powers under EU(W)A 2018 which would allow for amendment or repeal of primary legislation, T(CT)A 2018 , s. 51 gives ‘the appropriate Minister’ ‘Henry VIII’ powers to repeal primary legislation in relation to any of VAT, customs or excise duty by secondary legislation in the period up to April 2022 using the affirmative procedure which requires a positive resolution of both Houses of Parliament.
T(CT)A 2018 also contains a wide range of order-making powers of a more traditional nature in connection with the introduction of the new regime and its updating. These may require a resolution of the House of Commons (typical of UK tax legislation) or be done by the negative procedure.
What changes does T(CT)A 2018 make to the VAT rules on movements of goods between the UK and the EU?
The changes in T(CT)A 2018 are conditional upon the outcome of the Brexit negotiations with the EU. The changes as they stand may not come into force if a negotiated outcome is achieved. In the event of a negotiated outcome, the government will pass subsequent legislation, using existing powers or powers provided by T(CT)A 2018, to reflect the eventual outcome of the negotiation.
The main change is that the concept of acquisition VAT—ie VAT on the supply of goods between businesses from one EU Member State to another—will be abolished (s. 41(2)(a)). An import of goods from an EU Member State will incur a charge to import VAT on arrival of the goods at the UK port of entry (s. 41(2)(b)), rather than accounting for acquisition VAT in the next periodic VAT return. This may have considerable cash-flow implications for businesses importing from the EU. The UK government has issued guidance on ‘VAT for businesses if there is no Brexit deal’, and announced that it will introduce postponed accounting for import VAT (via the VAT return) (but only, as the matter stands now) in a ‘no-deal’ scenario.
Zero-rated exports of goods will no longer be restricted to exports to business customers, and apply to all exports of goods, without regard to their destination or the identity of the customer (paragraph 29(5), Schedule 8).
Other provisions that are relevant to the movement of goods between the UK and the EU are:
- HMRC has the power to make regulations to govern the VAT treatment of postal packets sent from overseas, making overseas sellers of the goods sent to the UK liable for VAT (paragraph 14, Schedule 8)
- HMRC has the power to require a VAT representative to be appointed for a person who is established in the EU if there is no relevant mutual assistance arrangement in place (paragraph 51, Schedule 8); and
- amendments are also made to the fiscal warehousing regime whereby certain goods can be traded VAT-free. The changes reflect that, in the case of fiscal warehouses, goods can no longer obtain such relief if transferred between a fiscal warehouse in the UK and one in a Member State (paragraphs 17–21, Schedule 8).
In relation to VAT on services, a significant change is the widening of the definition of ‘a relevant business person’ for the purposes of the place of supply rules. Under the current legislation, a person is a relevant business person only if it is a taxable person (but not necessarily VAT-registered) or a VAT-registered person, who receives the supply otherwise than for wholly private purposes (section 7A of the Value Added Tax Act 1994). T(CT)A 2018 simplifies this definition which will include all persons who carry on a business and receive services otherwise than for wholly private purposes, whether or not those services are received in the course of business (paragraph 8, Schedule 8). This means that many UK businesses who are not currently subject to the reverse charge regime may find themselves having to apply those rules post-Brexit.
What is the effect of T(CT)A 2018 on the operation of EU law relating to VAT post-Brexit?
The general position on the effect of EU law post-Brexit is set out in EU(W)A 2018. In relation to VAT specifically, the effect is as follows:
- all EU legislation and regulations in relation to VAT will cease to have effect. Instead the law and regulations will form part of domestic law as a result of EU(W)A 2018 (T(CT)A 2018, s. 42(1)); but
- the principle of EU law preventing the abuse of the VAT system is preserved and continues to be relevant—including the preservation of Halifax v HMCE (Case C-255/02), in which the ECJ held that the principle of prohibiting abusive practices applies to VAT and that if an abusive practice exists, transactions must be redefined to determine what the VAT consequences would have been in the absence of the transactions constituting that abusive practice, and of Axel Kittel v Recolta Recycling SPRL where it was established that a VAT-registered business can be denied input tax relief if the business knew, or should have known, that the supply in question was fraudulent (s. 42(4))
- the exercise of former EU rights and powers in relation to VAT will be subject to exclusions or other modifications made by regulations made by the Treasury (such regulations to be made before 1 April 2023) (s. 42(2) and (6))
- a UK court or tribunal may have regard to anything done after Brexit by the CJEU, another EU institution or office, body or agency of the EU in determining the law relating to VAT so far as it is relevant to any matter before the court or tribunal (s. 42(2) and EU(W)A 2018 , s.6(2)); and
- the principal EU VAT Directive 2006/112/EC and implementing Regulations will continue to have effect for the purpose of determining the meaning of the legislation subject to any changes required by the Treasury (s. 42(5)).
What provisions does T(CT)A 2018 make about the creation of a new customs regime post-Brexit?
T(CT)A 2018 covers a range of possibilities, ranging from a very close relationship with the EU to the ‘no deal’ option in which standard WTO rules would apply.
It gives HMRC power to make regulations to implement any customs union agreed between the UK and any other territory, but prohibits the UK government from entering into arrangements under which Northern Ireland forms part of a separate customs territory to the rest of the UK (s. 55). A customs union is one where no duty is charged between the UK and the other territory, and where the other territory and the UK have the same or substantially the same rules for charging duty on imports from third countries, with duty-free circulation of goods within the customs union. This would enable the UK to remain in or re-join the EU customs union on a permanent or temporary basis. The EU is presently the only customs union recognised as a WTO member in its own right, but others may emerge, particularly in the Asia/Pacific region.
In relation to customs and import duties, T(CT)A 2018 empowers the Secretary of State and the Treasury to create a new standard tariff which will classify goods as they are classified now by reference to nature, origin and other factors, to allocate a code to determine the rate of import duty and whether it is to be determined by reference to weight, volume or other measure. These rates are expected initially to be the same as those applied by the EU.
Preferential rates or rate quotas are possible to give effect to any free trade arrangement (“FTA“) made between the UK government and any other territory or country, and also preferential schemes for developing countries (which may be bilateral or unilateral arrangements).
It is anticipated that the UK will seek as quickly as possible to make arrangements to continue trading with countries that have FTAs with the EU on the same terms as they have agreed with the EU, except as regards the size of any rate quotas. If and when the UK leaves the EU customs union, it is hoped there will be a new comprehensive trade agreement with the EU that removes nearly all tariffs, similar in effect to the customs provisions of the EEA agreement between the EU and Norway, Iceland and Liechtenstein.
In any event, the standard rates will apply to imports originating in WTO member countries with which the UK does not have an FTA and T(CT)A 2018 deals with the mechanics of payment of these duties, including the person who is liable to pay import duty and the time at which it must be paid.
T(CT)A 2018 also empowers the Treasury to make comparable arrangements in relation to export duties.
What will be the impact on excise duties?
The precise impact on excise duties remains to be seen. T(CT)A 2018 enables the UK to establish a fully self-standing excise duty regime post-Brexit, but does not prescribe much detail as to what that regime might look like.
HMRC has a wide regulation-making power for excise duty purposes. For example, the regulations may make provisions:
- imposing a liability to excise duty on the entry of goods into the UK by postal packets sent from overseas, and dealing with connected provisions such as liability, registration, information powers and penalties (s. 44)
- dealing with the administration of a new excise regime, such as duty points, the holding and movements of goods, drawback, rebate, relief and exemptions from excise duty, the descriptions of chargeable goods, and record keeping (s. 45); and
- dealing with HMRC’s power to obtain information from businesses by imposing obligations on revenue traders to submit information to HMRC for the purpose of giving effect to international excise arrangements (s. 46)
In relation to the effect of EU law post-Brexit, the general position set out in EU(W)A 2018 applies. All existing EU provisions in relation to excise duty will cease to have effect and instead will form part of domestic law as a result of EU(W)A 2018 (s. 47(1)). The exercise of former EU rights and powers in relation to any excise duty will be subject to exclusions or other modifications made by regulations made by the Treasury (such regulations to be made before 1 April 2023) (s. 47(2) and (3)). A UK court or tribunal may have regard to anything done after Brexit by the CJEU, another EU institution or office, body or agency of the EU in determining the law relating to excise duty so far as it is relevant to any matter before the court or tribunal (T(CT)A 2018 , s. 47(2) and EU(W)A 2018, s. 4(1)).
What amendments were made to the Bill as it passed through Parliament, and what is the significance of these amendments?
There was an effort by ‘remainer’ MPs to insert a clause that would have bound the government to maintain a customs union with the EU, but this was successfully resisted. Nevertheless, s. 31(5) provides for the possibility of the UK entering into a customs union with the EU. In other respects, as an enabling Bill, the passage of T(CT)A 2018—although delayed for several months in the early part of the year—did not raise particularly controversial issues. The approach to ‘Henry VIII’ powers follows that in EU(W)A 2018.
How do the commencement provisions of T(CT)A 2018 work? How would a negotiated transition period impact the commencement and operation of T(CT)A 2018 ?
Commencement of the enabling provisions is immediate, but for the operative provisions is largely a matter of statutory instrument in order to accommodate the timing uncertainties outlined in answer to question 1. Some provisions apply only once EU law becomes directly effective under EU(W)A 2018 and therefore cannot take place before ‘exit day’, ie the day on which the UK ceases to be bound by EU law, which may not be coincident with the UK leaving the EU, but at the end of a transitional period. An agreed transitional period along the lines set out in the current draft of the Withdrawal Agreement would therefore postpone the introduction of most measures until at least 1 January 2020.
If measures are agreed which delay the UK, or part of it, leaving the EU customs union beyond the end of transition, the introduction and operation of any of the measures in T(CT)A 2018 would be delayed beyond the end of transition. It is also possible that in the context of a close FTA with the EU, the UK might continue to participate in some EU schemes (possibly something such as the tracking scheme for goods subject to excise duty), in which case some provisions may not be fully implemented.
This Article was originally published in Lexis Nexis in November 2018.