In the first in our new series on small businesses and the EU, our EU referendum panel tackles one of our readers’ questions on VAT and duties. The question is:

We are concerned as to VAT and import duties from Spain. We currently manufacture all of our shoes in Spain. What would change if we were not part of the EU?

Swati Dhingra

Assistant professor at the department of economics at the London School of Economics and co-author of Life after Brexit: what are the UK’s options outside the European Union?

The EU is Britain’s largest trade partner. If Britain votes to leave the EU, the government has not clarified which new trading arrangements would replace the existing free trade arrangement with the EU. This is why there is so much uncertainty about how UK businesses would be affected.

Brexit would mean that UK businesses need to deal with border controls when their supplies or sales cross the UK-EU border. These controls could range from satisfying rules of origin to substantial increases in import duties, depending on which trading arrangement replaces EU membership. To understand the possible effects of Brexit, let’s look at a couple of examples.

In the optimistic case, Britain would manage to strike a Norway-style deal with the EU after Brexit. Then it would be part of the European Economic Area (EEA), so the shoes imported from Spain would still come in duty-free to the UK because there is free trade between EU and EEA members. But the importer would need to show documents to prove to the UK border authorities that the shoes were made in the EU and not just re-branded there to bypass import duties levied on non-EU countries.

In the pessimistic case, Britain would not be able to immediately strike a trade deal with the EU. Then import duties negotiated at the World Trade Organization would kick in. If £10,000 worth of shoes were imported from Spain, the UK border agencies would charge £800 as import duties and also collect £2,000 as VAT on the imports.

Under both cases, Britain would not have access to the coordinated VAT collection of the EU. So a 20% VAT would need to be paid at the UK border, and the importer would no longer have the convenience of combining this with domestic VAT payments.

Lesley Batchelor

Director general of the Institute of Export. Shaping policy and decision making at the highest level, Batchelor is active on various advisory panels on exports, SME support and the all-party manufacturing group

This question sums up many of the uncertainties about the issue of leaving the European Union, and it is impossible to give a definitive answer.

A vote to leave the EU would mean an end to the UK’s access to free movement of goods. After an interim period while the terms of the UK’s exit and future relationship were negotiated, it would be inconceivable that any future solution would allow the UK to trade goods with EU states without some form of customs formalities, which would create customs clearance costs and the potential for delays to transits.

Future trading scenarios usually focus on the significance of import duties in international trade, and offer the vision of tariff-free trade via free trade agreements with the EU, like those enjoyed by Switzerland, Norway, or the imminent agreement between the EU and Canada. An alternative view might be the kind of Customs Union agreement between Turkey and the EU.

An agreement such as Turkey’s could be preferable. It would mean many goods could be traded between the UK and the EU without import duties simply by being in “free circulation” – which includes goods that have previously been imported from other countries as well as goods which come from the country of export.

The former option is more restrictive as duty-free benefits are limited to goods which “originate” in UK or EU, based on complex rules of preferential origin, considering not only where products are made, but the origin of the raw materials. In the case of this question, it would be the origin of the leather used to make the shoes.

However, both of the above scenarios would still require goods to undergo customs clearance when they are exported (from Spain), and also when they enter the UK, which would add to transport costs of all EU consignments. In addition, VAT would have to be paid by the importer at the point of entry, unlike the current EU VAT process, which might create cash flow issues for some traders.

Sjoerd Douma

Professor of international and EU tax law at Leiden university

Let’s start with VAT. From a financial perspective not a lot will change. Spain will technically regard the supply of shoes as an export of goods to a non-EU country. This transaction will be exempt from VAT in Spain. In the UK, the import of the shoes will be regarded as taxable event for VAT purposes (under the assumption that the UK will not change its VAT system after leaving the EU). The UK tax rate will be applicable and the VAT levied will be deductible as input VAT. So the only thing which will really change legally is the name of the transaction: export and import of goods instead of intra-community supply and acquisition of goods.

From a practical perspective, however, there may be a significant issue. This is mainly due to the fact that the administrative burden in the respective countries may be a lot higher, because the countries involved may be tempted to follow procedures similar to those in the area of customs duties.

Within the EU, there are no import or export duties within the customs territory of the community. If the UK left the EU, it would no longer be part of that territory. It would probably have to introduce an import levy on the shoes so as to provide equal treatment between goods imported from EU Member States and other third countries – World Trade Organisation law might require this.

Apart from the financial consequences, this would also lead to a significant administrative burden connected to the importation of goods. From a Spanish perspective, the shoes would leave the customs territory of the community. This would lead to the obligation to submit export declarations, leading to significant practical issues which might also apply to VAT.

Philippa Charles

A partner and head of international arbitration at Stewarts Law LLP

As your goods would continue to be manufactured in the EU, the first issue is export duties that might be applied by the EU to goods destined for the UK. This would be a matter for each individual EU member state government, though subject to the general principles applicable to taxation across the EU, including a harmonised approach to VAT rates.

If, however, having brought your goods into the UK, you wished to supply them back to the EU market, they might be subject to import tax – via a common customs tariff – on their reintroduction to the EU.

Key considerations as regards applicable export/import taxation include whether any work done on the goods in the UK amounts to a change of their country of origination, and whether it is in your best interests to ensure that their origination is deemed to be in the EU, so as to minimise the risk of duties becoming applicable.

The scope of your liability to additional VAT or import duties levied by the UK on goods from Spain – or export duties imposed by the EU on goods originating within it but destined for the UK market – would depend on the political agreement reached in the discussions between the EU and the UK that would follow the latter’s notification of its exit. In principle, such discussions should take no longer than two years; in practice, resolution of all the areas in which the EU has competency will take longer than this.

However, this will give you time to take advice in both the UK and Spain on whether your costs of doing business are likely to increase or decrease, assuming your business model remains the same.

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