Exploring the impact of Brexit on VAT

Monday 30 January 2017

By Ayuk Ntuiabane, Director - VAT, Equiom Solutions

‘Brexit’ - shorthand for the UK leaving the European Union (EU) – is firmly on the agenda. But what does it mean in practice and what impact would it have on VAT?

Much speculation about the possible impact of Brexit on the tax system has followed the UK referendum vote and has escalated given the Prime Minister’s recent declaration that the UK will leave the Single Market. However, no immediate changes have actually been made to taxes - as HM Revenue & Customs has advised on its helpline. This situation will likely continue until ‘Brexit Day’, the date the UK officially leaves the EU.

We know for certain that Brexit Day will not come before the summer of 2019. This is according to the UK Government’s announced timing on the triggering of Article 50 of the Lisbon Treaty. We are also assured that no Brexit-related tax changes will happen before Brexit Day because of the UK Government’s announced plans to introduce a ‘Great Repeal Bill’ (GRB), which will repeal the European Communities Act 1972 and incorporate EU law into domestic law ‘wherever practical’. The government has indicated that these legal changes within the Bill would take effect only on Brexit Day.

The GRB has not been published; when it is, it will be an important milestone on Brexit because leaving the EU will require major changes to the statute book. The GRB will contain delegated powers to enable the government to adapt any laws on the statute book that originate from the EU to fit the UK’s new relationship with the EU.

With the House of Commons Library estimating that 13.2% of UK primary and secondary legislation enacted between 1993 and 2004 was EU-related this will potentially be one of the largest legislative projects ever undertaken in the UK. It will require major swathes of the statute book to be assessed to determine which laws will be able to function after Brexit Day.

As it is not yet known when the legislative changes will be made to give effect to any withdrawal agreement with the EU, HMRC’s no-change-to-taxes advice to taxpayers is generally bound to hold true even for a significant period after Brexit Day.

Impact on VAT

The implications of the UK lying outside the EU are likely to be less significant for taxation compared with other policy areas. This is because taxation is very largely a Member State competence. The major exception to this generalisation is indirect tax, primarily VAT, for which there is a substantive body of EU law establishing common rules across Member States.

The EU’s harmonisation policy has long focussed on VAT. This is driven by the recognition that the setting of common rules across the Member States is an essential element to the achievement of an effective Single Market. The importance attached to VAT harmonisation is underlined by the requirement that it be decided by unanimity – unlike most internal market measures which use qualified majority voting. Also, any changes to national legislation must comply with the overarching provisions of the Treaty guaranteeing the free movement of goods, persons, services and capital across the Single Market and prohibiting discrimination. Case law examples abound where the European Court of Justice has ruled that individual provisions of a Member State’s tax code fail this test.

The consequences of the EU’s shared competence in VAT is that there is a firmness about the tax that has limited the discretion available to the Member States to change how they apply it to individual goods and services. For this reason at least the GRB is an unavoidable step on the path to Brexit – there needs to be a legal hiatus in the Brexit process in order for the UK to acquire the competence and ability to change anything.

And yet even while exit from the EU would give this power, the UK government would be unlikely to substantially change, let alone abolish, VAT. The relative importance of VAT to the Exchequer – accounting for around 17% of all government receipts in 2016 according to the Office for Budget Responsibility – would suggest that the UK government would more likely keep the tax and use changes to the VAT system to further political objectives – e.g. by narrowing or widening zero-rating, exemption or the use of lower rates.

But this does not mean that there will be no change at all on Brexit Day. There are, after all, a number of EU-wide special regimes relating to the common treatment of transactions, which will have to fall away with Brexit. This is especially so if by leaving the EU the UK also leaves the pan-EU common system of VAT and the Customs Union.

In the event the UK will become a ‘third country’ dealing with the other 27 EU Member States like any other non-EU country does currently:

  • Goods sent from businesses in the UK to EU Member States will be treated as exports rather than dispatches
  • Services provided by businesses in the UK to EU Member States would be ‘exported’ rather than intra-community. These may or may not have financial impact, but the compliance obligations would certainly change - such as no longer having to complete EC Sales Lists and Intrastat
  • Goods bought from EU suppliers would become imports rather than acquisitions, and would be cleared as such; but services bought in from EU businesses would continue to be reverse charged
  • The Mini-One-Stop-Shop (MOSS) currently used by EU businesses providing electronic services to consumers in the UK and vice versa to account for output tax on relevant B2C transactions would no longer be available. Such EU businesses may have to register for VAT in the UK (as ‘non-established taxable persons’) and the UK businesses would have to register and account for VAT in an EU member state under the ‘Non-Union’ scheme
  • The scheme for the cross-border refund of VAT between EU Member States would also change with the UK lying outside. This would be substituted by the Thirteenth Directive scheme which currently operates between the EU and third countries, to the extent that the UK and the EU agree to such reciprocity

Then there are a number of EU instruments relating to administrative co-operation to exchange information and help tackle tax evasion. It would be expected that the UK outside the EU would seek to maintain some form of bilateral agreement akin to these provisions, given the international dimensions to taxing multinational corporations fairly and effectively tackling tax avoidance.

Conclusion

Thus it would be a safe bet to assume that with VAT it will be business as usual in the lead up to Brexit and even beyond, and also that the role of VAT in the British tax system post Brexit is guaranteed. However, the movement of goods and the provision of services between the UK and the EU is likely to be impacted. How big the impact will be would depend on what alternative arrangements the UK agrees with the EU. Complications in cross-border administration and cash flow costs would be matters to watch and manage, especially if Brexit means the UK leaves both the VAT and Customs Unions.