No one wants to talk about VAT. I once turned that to my advantage: early in my career I did a lot of lecturing on VAT precisely because no one else wanted to do so: it paid well as a result.<\/p>\n
Now no politician wants to talk VAT. They don't understand\u00a0it. They should. It's going to cause Brexit mayhem.<\/p>\n
VAT is in essence simple when it comes to borders, at least with regard to goods. There is no VAT on exports. There is VAT on imports. That's the principle. It's a bit more difficult\u00a0when it comes to services. But let's just stick to goods for now. The simplicity is appealing. You just have to know one thing, and that's when the goods have crossed a border.<\/p>\n
It has taken decades for the EU to work out how to do this. It's just about got there. Just about, I stress. Between VAT registered traders the arrangement has become relatively straightforward: it's pretty much automated and declarations can be cross-checked, at least in theory. We've finally\u00a0got most distance selling to non-VAT registered customers sorted too, but only recently. And notorious abuses, such as the Channel Islands abuse of what is called low-value consignment relief\u00a0have been largely\u00a0eliminated. I am not saying fraud has ended: that would be wildly optimistic. But the abuse of old, where the same goods crossed borders time and time again until eventually a fraudulent claim for tax was made with no matching declaration of liability being made has been curtailed, at the very least. You have to be a somewhat more sophisticated now.<\/p>\n
And then we get to Brexit. And the arrangements that exist within Europe to make sure that goods can be traced across borders\u00a0precisely to make sure that this fraud - which cost billions a year to the UK - will be denied\u00a0to the UK. They will have to be. The system depends upon the exchange of sensitive data. And sensitive data requires protection within and between states.\u00a0 Which means that the court has to be involved. And in the case of VAT that is the European Court of Justice,\u00a0 whose jurisdiction the UK is now refusing to accept.\u00a0 And that means we will be outside the VAT system for Europe.<\/p>\n
The consequences are enormous.\u00a0 They are grim for our exporters: they will suffer a cost disadvantage as every export from the UK will be an import into Europe.\u00a0 That will mean that every single one will have to be processed upon arrival somewhere on the continent, and VAT will have to be paid. That's a significant processing cost, and a cash flow disadvantage.\u00a0 \u00a0The VAT does not act like a tariff;\u00a0 it would have eventually been payable anyway,\u00a0 in some place by someone,\u00a0 but the processing charge is a tariff.\u00a0 And cash flow is always an issue.<\/p>\n
For importers\u00a0 the situation is as difficult.\u00a0 According to the FT<\/a>,\u00a0 Heathrow alone handles more than 2 million parcels a day.\u00a0 A majority of these come from the EU:\u00a0 they just flow through the system right now.\u00a0 But that will not be the case after Brexit.\u00a0 Every one will need VAT paid. And a processing charge will be due: that's usually \u00a38\u00a0 on delivery, payable to the Royal Mail,\u00a0 on top of the VAT owing, at present.<\/p>\n It is pointless to pretend that the free flow of goods will not be disrupted in this case:\u00a0 it will be. We do not have the infrastructure to handle this at present.\u00a0 Nor have many businesses got the margin to handle distance selling in these situations:\u00a0 for many small UK businesses this will be deeply prejudicial:\u00a0 import and export will be beyond their reach.\u00a0 And let's not pretend that this is good news:\u00a0 we simply cannot make everything ourselves. We will be worse off.<\/p>\n