The European Commission has warned that some 130,000 companies could be affected by the UK leaving the EU’s value added tax area.

The commission issued a notice earlier this month advising that with no agreement on tariffs, the UK will be treated as any other non-EU trading nation post Brexit.

What does this mean?

UK importers would be required to make an up-front VAT payment in addition to any customs duties. This VAT payment will rank as input VAT that can be reclaimed from HMRC.

However, a problem will arise if an importer submits VAT returns quarterly. Any VAT paid to HMRC when they import goods will be authenticated by the issue of HMRC’s form C79 (this form is issued monthly). Once issued this can be treated like a VAT invoice and included on the next VAT return.

Accordingly, the importer will not be able to reclaim VAT until this form is received.

Affected businesses therefore need to add the VAT costs each quarter to their cash flow as it could be up to four months until a refund of import VAT paid can be recouped.

In addition, if no VAT agreement is negotiation before we leave the bloc, nearly 3 million small UK businesses that are currently exempt from paying VAT because they generate turnover of less than £85,000 a year will have to start paying VAT on sales to EU customers.

The government have stressed that the final VAT rules for cross-border transactions will depend on the outcome of Brexit negotiations, but it’s hoped they will respond to lobbying (by organisations like the Federation of Small Business and the British Retail Consortium) on this issue.

Perhaps they will allow some form of deferment of the VAT payable or speed up the reclaim process? We can only hope to hear soon.