There are still many uncertainties about what form Brexit will actually take, but given Theresa May’s pledge to invoke Article 50 by the end of March 2017, it is worth contemplating what impact it will have on the UK’s existing tax system.
It is expected that VAT, as a European Union legislated tax, will be affected most. The UK introduced VAT in 1973 as a requirement to us joining what was then the European Common Market and operation of VAT is a mandatory requirement for all member states of the EU.
Although, theoretically it will be possible for the VAT system to be abolished in the UK post Brexit, I wouldn’t encourage anyone to get too excited about the prospect of that happening. In 2015/16, of the £535bn plus of tax revenue generated, VAT accounted for 22% of this, second only to Income Tax. It would appear inconceivable that this level of tax income could be generated from elsewhere. Add to this the fact that a VAT like system is operated in over 160 countries worldwide, it would appear to be a safe bet that VAT is here to stay, Brexit or no Brexit.
However, the big question is what VAT will look like in the UK post Brexit?
Leading up to the UK’s actual exit from the EU very little is expected to change and if, as part of the government’s negotiations with the EU, a deal is struck for the UK to remain within the EU VAT union, very little will change post Brexit either.
Only time will tell whether such an agreement will be reached, but on the premise that it is not, the real uncertainty then begins.
Currently as part of the single market, UK businesses can acquire and dispatch goods to and from the UK duty free and a simplification method is in place for accounting for VAT.
For the acquisition of goods from the EU, VAT registered UK businesses do not pay VAT in the country of the supplier, if they can provide the supplier with their UK VAT number and the supplier can obtain relevant evidence that the goods have left their country and been transported to the UK.
On arrival in the UK, the goods are not held up at customs whilst import VAT is paid, but instead acquisition VAT is accounted for on the next VAT return. This acquisition VAT is then recoverable as input VAT based on the businesses usual VAT recovery position.
Were the UK to leave the single market, the most likely consequence on these transactions would be that rather than being treated as acquisitions, with the VAT accounted for on the next VAT return, they would instead become imports. Import VAT would be due at customs before the goods can be released, with this VAT only recoverable on the next VAT return, creating the potential for significant cash flow dis-advantages for businesses in comparison with the current position.
The impact of customs duty will also be a major concern. If an agreement cannot be reached for the UK to be part of a customs union with the EU, then customs duty may also be charged on the import of goods from the EU – this is not recoverable, so would be an actual additional cost for businesses buying goods from EU suppliers.
Likewise, the sale of goods to the EU may also attract duty in the recipient country, reducing the attraction for EU customers to purchase from UK suppliers.
The purchase from, or sale to, businesses in the EU of many services is likely to remain relatively consistent even after Brexit. Currently when UK businesses purchase services from an overseas supplier the general rule is that it is the customer’s responsibility to account for VAT on the supply in the UK, under the reverse charge. This is the same, whether the supply is from an EU or non-EU supplier.
UK businesses selling electronic services to non-business customers located elsewhere in the EU may be significantly impacted by Brexit. The place of supply for such services is where the customer belongs, creating a registration obligation in every EU country where electronic supplies are made to.
The Mini-One-Stop-Shop (MOSS) system was introduced to prevent this multiple country registration requirement, with UK businesses only needing to register for MOSS in the UK, with HMRC then distributing the tax collected to the other EU countries. On Brexit, it would be expected that the UK would no longer be able to operate this simplification, meaning that businesses providing electronic services to non-business customers located in the EU, would be required to obtain a VAT registration in at least one EU country.
Currently EU VAT law has an overriding impact on UK VAT legislation. Decisions made in the European Court of Justice are binding on UK legislation and it is difficult for changes to be made to the existing legislation. This has been evident in recent times, with the UK’s battle to retain reduced rating on energy saving materials and the much-reported tampon tax issue.
On Brexit, theoretically it would become possible for the incumbent UK government to make alterations to the existing VAT legislation without the need for EU approval. This would likely result in many lobby groups putting pressure on the government to reduce the VAT liability of supplies in certain industries and VAT being used more often as a political tool to attract support at elections.
The ongoing reliance of previous case law which has been decided at a European level would also be brought into question, with a potential consequence of Brexit being that HMRC revisit cases which have gone against them in the European Court of Justice.
Currently EU law dictates that members can apply a standard rate of VAT, along with a maximum of two reduced rates, with a minimum rate of 5%. The UK has an exception to that minimum rate rule with our zero rate, which was agreed upon joining back in 1973. Going forward post Brexit there would be greater flexibility for different rates, and we could end up with much more than the three current taxable rates – this may see a reduction in VAT charged on certain supplies, but would also increase the administrative burden of VAT.
Currently the only certainty that Brexit brings is uncertainty and until Article 50 is triggered and formal negotiations begin between the UK government and their EU counterparts, this will not change.
I am sure that there will be much more pressing issues on the agenda than VAT, but the impact that these negotiations have on VAT will need to be considered very carefully by businesses to ensure ongoing compliance.
There may be drastic changes to the VAT system in the UK post Brexit, or alternatively any changes could be very minor, only time will tell. As always, VAT will never be dull...