More than 100,000 UK companies will be forced to pay VAT upfront after Brexit, under controversial government plans being debated by Parliament this week.
Changes outlined in one of the many Brexit-related bills would force companies to pay the levy on goods at the point they enter the UK, rather than after they are sold.
Business groups said the change would create severe problems for UK companies, including cashflow issues and additional bureaucracy.
At least 130,000 UK firms will be forced to pay upfront import VAT once Britain leaves the single market, under which import tariffs are not imposed on goods bought from other EU countries.
Currently, firms can register with HMRC for permission to import some goods from the EU free of VAT. They register the charge but the levy is added to the price of the product and paid by the customer.
Under the new system being planned, the Government said, “import VAT is charged on all imports from outside the UK”.
Businesses would then have to pay the tax upfront and claim it back at a later date, meaning they would be spending significant sums of money long before they recoup them in sales.
Industry groups said the change could create major problems for UK importers and retailers.
In a briefing sent to MPs, the British Retail Consortium said: “If the bill becomes law without any commitment to inclusion within the EU VAT area, UK businesses will become liable to pay upfront import VAT on goods being imported from the EU-27 for the first time.
“Liability for upfront import VAT will create additional cashflow burdens for companies, as well as additional processing time at ports and border entry points attached to the customs process. Mitigation measures could include companies instituting a revolving credit facility, or utilising import VAT deferment reliefs.
“Both measures require companies having to take out costly bank or insurance-backed guarantees, so would increase the costs of importing goods from the EU.”
The changes are contained in the Taxation (Cross-border Trade) Bill, which MPs are due to debate on Monday.
Labour backbencher Chris Leslie told The Observer he planned to table an urgent amendment that would keep the UK in the EU Vat area and therefore avoid the additional burden for British businesses.
He said: "If firms have to start paying VAT up front at border entry points, this could upend decades of normal business practices and add millions of pounds in bureaucratic costs that won't just hit profit margins, but will likely be passed on to customers via higher prices."
One small business owner told The Independent the changes would be "disastrous" for her company.
Sally Stephenson, who owns The Pencil Case and The Toy Box, two independent high street shops in Cowbridge, South Wales, said: “My business isn't big enough to import directly, so I buy stock from wholesalers who do. At the moment EU products are imported into the UK without any VAT added, so those lower costs are passed all the way down the supply chain to end-users like me.
"If importers have to start paying VAT upfront - not to mention implement new time-consuming and expensive administrative and customs processes - these additional costs will have to be passed on. I anticipate cost prices will rise by at least 20p per cent if this happens, and retail prices will have to go up accordingly.
"My cost prices have already increased by an average of 13 per cent since the EU referendum, due to the fall in the value of the pound. A further 20 per cent increase on top of this would be disastrous for small businesses like mine. Stock accounts for two-thirds of my total costs and I simply cannot afford for prices to go up any more."
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