Brexit and VAT

In the April/May Newsletter we outlined what might happen if the UK voted to leave the EU. Following Friday’s result here’s a more detailed look.

What happens to VAT now?

In the short term, nothing changes. Formal exit would start when (or is it if?) the UK triggers Article 50 of the Lisbon Treaty, which covers the voluntary exit of an EU member state. There would then be a renegotiation period of up to two years when the UK and remaining 27 member states will agree separation terms. This will include agreeing on how UK companies will comply and report VAT transactions with companies and individuals in the rest of the EU.

The Brexit vote is therefore unlikely to result in immediate changes to indirect tax law, practices and policy. But on formal Brexit there will be major changes coming.

What will happen to EU trade?

If and when we leave the EU it is unlikely that UK businesses will be able to trade in goods across the EU in the same way that they have been doing since the single market was introduced in 1993. The major VAT change would be the loss of intra-community trading status. Instead of zero-rating B2B sales to EU companies, transactions will be treated as imports into the EU (exports from the UK), and subject to EU VAT.  The requirement to complete Intrastat and EC Sales Lists will end, but new import and export documentation, generally done by the freight forwarders or customs brokers, will have to be completed. This can cost around £20 per export or import. We would also have a new Customs land border with Ireland.

VAT MOSS

The Mini One-Stop Shop or ‘VAT MOSS’ that was so much in the headlines recently would continue for businesses selling electronic services to consumers in the EU. UK businesses making such supplies would still have to register, either by registering in every member state into which the supplies are sold, or via the MOSS. The main change here is that UK suppliers would have to choose an EU member state in which to register under the MOSS. Unfortunately, the plans for a minimum supply threshold for VAT MOSS registration that was so hard fought for by micro-businesses and the UK government is now likely to be abandoned by the rest of the EU.

In the future

Without the VAT Directive and the European law framework, a major  issue will be around the interpretation of VAT law.  Tax law is interpeted by the courts and thus is subject to change according to tax cases. Before the UK actually secedes, the UK courts are still bound by decisions of the Court of Justice. With effect from the date of secession, taxpayers will no longer be able to rely on the “direct effect” of EU laws and the UK Supreme Court will become the final arbiter of all cases relating to VAT, instead of the European Court of Justice (ECJ). But of course previous UK court decisions will in many cases have been decided by reference to the VAT Directive and ECJ cases, so it’s far from clear how the courts will deal with this. In addition there are likley to be “holes” left in UK law which will need to be plugged. All of that is going to take time.  The VAT rules in the UK, in common with many other parts of our legislation have evolved over the last 40+ years using EU concepts; the UK courts will in future need to build a whole new framework of interpretation. That could mean we will have to revisit many questions about how VAT works in the UK.

VAT rates

The current EU rules are: a minimum 15% standard rate; and only two reduced VAT rates which must be 5% or higher. On secession the UK will be able to set its own standard rate (or introduce higher rates) and to change reduced VAT rates on products like domestic fuel, women’s sanitary products and e-books. The EU has however already announced plans to allow similar freedoms to other EU countries within the next 18 months under the current EU VAT Plan.

Similarly, the UK will no longer be required to keep the VAT exemptions (mostly there for social reasons, but also applied to many financial transactions) in the EU VAT Directive. The UK will be able to set its own exemptions, change the current ones or remove them. It seems unlikely that the UK would want to impose significant change on financial services but it could, for example choose to ignore recent changes, which were not to its liking, such as the imposition of taxation on outsourced financial services.

Changes to other social exemptions could have major implications for the cultural, leisure and charitable sectors. Some of these, including the cultural services, sporting and education exemptions, have been the subject of VAT planning and contentious VAT claims. Change may be some time off, but the UK (or England if it comes to that) could in future move to prevent what it sees as anomalous treatments, when it will be able to do that without reference to any overriding EU legal principles.

If you have other immediate questions not answered above, please get in touch.