Theresa May is facing a New Year clash with opponents of Brexit as soon as MPs return to Westminster after their two-week Christmas break.
Pro-Remain MPs claim that under new legislation being debated in the Commons on Monday, UK firms will be forced to pay VAT up front on imports from the EU.
The VAT changes, included in the Government’s Taxation (Cross-border trade) Bill, could affect more than 130,000 UK firms, according to anti-Brexit MPs.
Nicky Morgan, the Tory Brexit rebel who chairs the Treasury Select Committee, has told Sky News she plans to ask her committee to launch an urgent investigation when it meets on Tuesday.
She also said she plans to write to HM Revenue and Customs asking what contingency plans are being made to help UK importers avoid being hit by up front VAT demands.
The Government’s own explanatory notes on the Bill, provided for MPs ahead of its second reading on Monday, says the existing tax regime will end so that import VAT is charged on all imports from outside the UK.
Already the pro-Remain Labour MP Chris Leslie, who moved dozens of amendments to the Government’s EU (Withdrawal) Bill before Christmas, says he plans to table amendments to the new legislation.
He told The Observer his amendments would be aimed at ensuring the UK remains in the EU VAT area, a move that will be bitterly opposed by pro-Brexit MPs for whom tax and financial sovereignty is a key demand.
Mr Leslie told the paper: 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.
There are 141,000 British companies currently grappling with the registration, import VAT payments and compliance costs of trading with non-EU countries.
This could virtually double, when the 132,000 businesses who at present trade only with EU member states is added to this number.
Pro-Remain Chancellor of the Exchequer, Philip Hammond, told The Observer: “Britain is a great trading nation and innovative UK businesses are central to the success of our economy.
“This Bill represents the first step in setting up an independent UK customs regime and reaffirms our commitment to deliver a smooth transition for businesses as we leave the EU.”
And on the VAT claims made by pro-Remain MPs, Treasury sources said the precise nature of the UK’s future customs relationship with the EU would be the subject of Brexit negotiations with Brussels.
At present, UK companies that import machine parts or goods ready for sale from the EU can currently register with HMRC to bring them into the UK free of VAT.
They register the VAT charge and reclaim it later, all as a paper exercise.
VAT is added to the price of the good whenever it is sold to the final customer.
Without a VAT deal with Brussels, however, importers must pay the VAT up front in cash and then somehow recover the money later, creating a huge outflow of funds before they can be recouped.
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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 up front import VAT will create additional cash flow burdens for companies, as well as additional processing time at ports and border entry points attached to the customs process.