At present, the United Kingdom is bound mostly by the rules outlined in the Unions Customs Code (“UCC”) (Regulation (EU) No 952/2013) which modernised the customs process in the European Union and repeals the previous Community Customs Code and Modernized Customs Code.
It entered into force on 30 October 2013(with most provisions applying from 1 May 2016) and further effects Articles 33, 114 and 207 of the Treaty on the Functioning of the European Union (2012/C 326/01). While the UK has voted to leave the EU, the UK (and by extension, legal practitioners advising clients) must abide by the rules contained within the UCC until Parliament passes new legislation to replace the Code.
In terms of Value Added Tax (“VAT”) and excise legislation, this has largely been harmonised across EU Member States. VAT is mostly controlled by the EU Principal VAT Directive (Directive 2006/112) and excise is controlled through the Excise Directive (Directive 2008/118). The former has been transposed into UK law via the Value Added Tax Act 1994 and the latter via, inter alia, the Customs and Excise Management Act 1979.
In advance of the UK formally leaving the EU on 29 March 2019, UK Parliament has drafted the Taxation (Cross-Border Trade) Bill (the “Bill”). This will enable the UK government to establish its own standalone customs regime and to ensure that VAT, along with excise legislation, can operate effectively in the future. This Bill is required, as current customs legislation is based in EU law and is directly applicable to the UK. The Bill provides a choice on the continued application of elements of EU law it wishes to and those to be dropped, dependent on political leaning and a hard or soft Brexit.
The Bill has some novel elements to it. It removes the current distinction between a cross border transfer of good and services involving EU member states and non-EU member states. The impact of this is first noted at clauses 41(2)(a) and (b). An import of goods from any EU member state will not attract acquisition VAT but will incur an import VAT charge upon the arrival of the goods at any UK port of entry, as if those goods had arrived from outside the EU. Unlike acquisition VAT, import VAT usually is paid up-front to clear the goods through Customs. The Bill (at Schedule 8, 30 (5)) zero-rates an export of goods from the UK to any EU member state regardless of that customer’s status. The Bill also extends the circumstances in which a cross-border supply of services to non-business persons can be zero-rated.
There is also provision for a post-Brexit import duty regime, which previously came under the exclusive competence of the EU. The Bill imposes a new charge to tax on the import of goods from any non-UK country and disapplies any directly effective EU law concerning import duty. In order to effect this, the Bill gives the government far reaching powers to:
- change the provisions of the Bill once it is enacted by issuing regulations to amend or supplement import duty rules (clause 30);
- lay down regulations in consequence or connected to the UK’s withdrawal from the EU (clause 51); and
- have unrestricted power amend any “such provision as they consider appropriate in consequence of this Act” (clause 54).
Moreover, at clause 42(1), EU regulations on VAT are disapplied to provide the UK with greater flexibility to re-structure its domestic VAT system. The Bill maintains that (clause 55(3)) the VAT provisions will only come into force if and when regulations are made specifying a commencement date, meaning that the system may not change at all and is dependent on exit negotiations.
The difficulty for junior lawyers comes with the fact that it is the EU withdrawal negotiations, as opposed to the UK’s legislative process, which shall determine the detail of any future taxation regime. The government can be seen to be guided by three strategic objectives: (i) to ensure EU-UK trade has the least friction possible; (ii) to avoid the creation of a hard border between Northern Ireland and EIRE (or in the Irish Sea for that matter); and (iii) to establish independent international trade policy. Uncertainty and public policy considerations inherent in such objectives will provide for a lengthy period of uncertainty and a minefield for those training and subsequently practising in areas of law affected. The law will only be finalised once the Brexit negotiations come to a close after the end of any potential transition period, however, there is the potential for opportunities for junior tax lawyers. Clients will be heavily reliant on the advice of their tax lawyers to plan their strategies through any transition period that may come to fruition and beyond the withdrawal negotiations. This will be one of the most exciting times for junior tax lawyers to sharpen their analyses of changing law and create strong client relationships.
Overall, despite any upheaval, it is likely that customs and tax law will remain the same for some years after exit to provide stability to businesses and the markets. With the Bill heading to the ‘report stage’ through the House of Commons, it will be interesting to read the critiques from the House of Lords and in particular, to see what final form the Bill and its subsequent accompanying statutory instruments take.