To understand whether Boris Johnson's plans for Brexit will work, consider the humble Malm bed from Ikea.
The frontrunner to become UK prime minister denies he is already measuring the curtains for Number 10, but if he was checking out bedroom furniture on this week’s visit to Belfast, the bed would set him back £315. Alternatively he could drive to Dublin Ikea and buy the bed for €350. The prices match at Wednesday’s euro exchange rate of €1.114 against sterling.
In Belfast, having charged 20 per cent value added tax, HM Revenue & Customs would receive £52.50, while in one of the two Ikea stores near Dublin, Irish Revenue would collect €65.45 from the 23 per cent VAT rate.
Let’s wind the clock forward four months to Mr Johnson’s dream Brexit, in which the EU signs a basic free trade agreement with the UK and keeps the Border open with no tariffs, no checks and no border infrastructure.
Tax avoidance
Under EU rules, British people would become eligible for an Irish VAT refund on their purchase of the Malm bed in Dublin. So long as they showed proof of residence in Northern Ireland and declared the goods would leave the EU, they would get a refund. The trip to Dublin would save Belfast consumers almost 20 per cent, not bad for a 100-mile (160km) drive and a bit of bureaucracy.
Their tax avoidance would be completely legal. It is a feature of EU nations’ VAT systems that they seek only to tax residents of the bloc. The UK has said it will not charge its VAT on personal imports after Brexit, so is inviting this activity, which will become significant. Belfast’s retailers should be afraid, very afraid. They need look no further than the destruction of most British music retailing when it was challenged by VAT-free CDs posted from the Channel Islands in the 1990s and 2000s.
The Irish Government would have its own invidious choices. It could break the EU customs’ practices and refuse to impose Irish VAT on a Malm bed imported by Irish residents from Belfast’s store at the land border. That would be likely to see a reverse flow of shoppers going north and both sides would be rash to assume lost revenues would be small.
A second unpleasant option would be to put in place VAT import controls on the border, effectively breaking the Belfast Agreement which has kept the peace on the island of Ireland. Third, the Irish Government could attempt behind-the-border checks. In this example, that would mean officials literally snooping inside the bedrooms of its citizens.
Alternative arrangements
It is precisely these obvious problems that will ensure the failure of Mr Johnson’s proposals. Similar suggestions have already prompted Sabine Weyand, the deputy Brexit negotiator for the EU until her recent promotion, to tell MPs last year that it was “very important” for the EU to “ensure that VAT is levied correctly” because it is a significant source of revenue for every EU member state and the tax already suffers from significant cross-border fraud.
The British attitude has been to wish such problems away. VAT is not properly addressed in the recent report on “alternative arrangements” that Mr Johnson said was a “brilliant” solution to the Irish Border question.
This lack of seriousness has been a feature of British attitudes since the 2016 Brexit referendum. Three years on, trade-offs are ignored and the UK still pretends there is a halfway house that allows both freedom from EU rules and frictionless trade.
The unwillingness to face tough choices before or after the referendum is the real tragedy of Brexit. It is possible to have a functioning tax system either with border controls, as Switzerland imposes, or by being an integral part of EU systems. Instead, we are told by Mr Johnson that these genuine problems are solvable if we believe hard enough and have faith. It is enough to make anyone cry themselves to sleep in a tax-free Ikea bed. – Copyright The Financial Times Limited 2019