Article 50, the Repeal Bill and the future of VAT

At the end of last month the UK formally triggered Article 50 and the Government published a White Paper on the Repeal Bill, which has clarified how the UK will treat existing European Case law after the UK leaves the EU. This will impact on the future of VAT. Details of the repeal bill can be found here

Background

Currently the European Communities Act 1972 (ECA) gives effect to EU treaties in UK law and provides for the supremacy of EU law. It also requires UK courts to follow the rulings of the Court of Justice of the European Union (CJEU). Some EU law applies directly without the need for UK implementing legislation, but other parts of EU law have to be implemented in the UK through via domestic legislation.

The intention is that the Repeal Bill will repeal the ECA. It will also convert EU law into UK law as it stands at the point of the UK’s exit from the EU. This will give some certainty to businesses and allow them to continue operating in the knowledge that rules will not change significantly and suddenly on the UK’s exit from the EU. It will then be down to Parliament or where appropriate, the devolved legislatures, to amend, repeal or change any piece of EU law (once it has been brought into UK law) once the UK is out of the EU.

The Bill creates powers to make secondary legislation to enable corrections to be made to laws that would otherwise no longer operate appropriately once the UK leaves the EU and will also enable changes to domestic law to reflect the content of any withdrawal agreement made under Article 50. It will also give the UK Government once we havelef the EU powers to change the scope and operation of domestic VAT .

Existing EU case law

Following the EU referendum, there had been significant speculation and varying views on how the UK would treat existing CJEU case law, and its impact on the UK tax legislation once  the UK leaves the EU. The repeal bill clarifies that  case law precedent from the CJEU will continue to apply (for a time at least) and that any uncertainties/disagreements over the meaning of UK law after the UK leaves the EC derived from EU cases will be decided by reference to the CJEU case law as it exists on the day the UK leaves. So the European Court of Justice will no longer have any jurisdiction in the UK, but its existing case law, up to the date of withdrawal, will continue to be binding on UK courts as they interpret EU law that has been converted into domestic law.

The bill  is therefore  likely to give CJEU case law similar precedent status to decisions of the UK Supreme Court and both HMRC and appellants  may continue to rely on case law as they have up to this point.  After exit UK legislation (including that relating to UK VAT) passed by Parliament will take precedence over preserved EU-derived law and thus UK VAT and tax law is likely to start to diverge from EU law gradually as UK case law develops. The Office of Tax Simplification  is also currently considering changes to UK VAT that could be made once the UK exits the EU.

Customs issues

Some bills will be necessary to ensure the law continues to function properly from day one, and this includes a Customs bill to establish a framework to implement a UK Customs regime, because this cannot be met by incorporating EU law.

The likelihood is that a Customs border will come into existence early in 2019 with the potential to cause disruption to movement of goods coming in and out of the UK. It is hoped that the Government will publish proposals as soon as possible. The Customs Declaration Services (CDS) programme was intended to replace the existing system for handling import and export freight (CHIEF) from January 2019. Now that the Government has made a decision to leave the EU Customs Union, there is serious concern that this project will be in place on time.

There is still much uncertainty which can only be addressed when the terms of the UK’s departure from the EU are clearer.

Arts Council information on museums and galleries tax relief

In Budget 2016 the Government announced that it would introduce a new tax relief for museums and galleries to support them to develop new exhibitions and to display their collections to a wider audience. The draft legislation was published in clause 22 of the draft Finance Bill but due to the forthcoming election it was removed from the Bill. The Treasury has stated that the government will legislate for the changes at the earliest opportunity in the next Parliament. It will be for the new government to decide what to recommend to Parliament.

Information on the proposed relief is available on the Arts Council website here, with links to HMRC.

Making Tax Digital – will you be ready?

HMRC issued six Making Tax Digital consultations in August 2016 which outlined its plans to modernise the tax system. The main proposal under consultation was the need for over 5 million businesses with turnover over £10,000 and those receiving rental income from properties, to submit quarterly updates of their business activity to HMRC digitally. The requirement is to keep records digitally using a method that is compatible with the MTD programme. HMRC have stated that they will publish a list of providers who offer compatible services. HMRC initially stated that free software would be available for this but so far details have not ben announced.

On Monday 20 March 2017 the draft Finance Bill was published confirming plans to go ahead with quarterly direct tax reporting for unincorporated businesses (sole traders) and landlords with turnover over the VAT threshold (£85,000 from 2018/19 tax year) from April 2018. Initially this will affect sole traders, landlords and the self-employed.

Those who are below the VAT threshold will have to start mandatory quarterly reporting from April 2019. Partnerships with fee income above £10m will have a deferral to April 2020, aligning them with limited companies which also begin quarterly filing from April 2020.

All VAT registered businesses irrespective of turnover levels will have to report VAT through the new system from April 2019 as current arrangements will be superseded and any online or paper submissions outside the Making Tax Digital IT system will not be permissible. At Budget 2017, the Chancellor confirmed that businesses will be able to continue to use spreadsheets for record keeping (a concern for many VAT registered traders who are partly exempt) but their software must be able to interact with those spreadsheets so that the requirements of digital reporting are met.

The £10,000 turnover entry limit is not mentioned in the bill so it appears that this may still be up for debate as part of the ongoing HMRC consultations.

Agents/accountants

The MTD process for agents is still being refined by HMRC. At the moment it appears that agents will be required to register for Agents Services to allow them to act on behalf of their clients under MTD. To register for this they will need to request a new “clean” set of user credentials from the Government Gateway and carry out a mapping process in order for any existing 64-8 relationships to be carried over to these new set of credentials.

Charities

The Government has confirmed that it will introduce legislation to exempt charities from the Making Tax Digital requirements. It is important to note however, that charities are exempt only from these new reporting requirements and clarification is being requested from HRMC on the process for charities managing their existing ongoing tax reporting requirements,

However, the Government has decided that charity trading subsidiaries should be within the scope of the MTD obligations. The Charity Tax Group had called for trading subsidiaries to be included within the exemption as a charity will often use a subsidiary to make its activities tax effective or to accommodate any trading activities, often a requirement dictated by administrative, legal and financial practicalities. As the charity is responsible for the administration of the subsidiary, processes and staff resources are often shared across the organisation. Therefore, if a charity subsidiary was required to comply with these rules, it would mean that the charity would have to operate two systems (which adds complexity) or consider maintaining digital records for the whole charity group, undermining the proposed exemption. CTG has also questioned how this will work with a charities registered with a subsidiary in a VAT group.

MTD implementation timeline

April 2017 – public testing opens

April 2018 – businesses with turnover above VAT threshold £85k

April 2019 – expanded to cover VAT Reporting and self-employed small businesses with turnover above £10k

April 2020 – corporations and partnerships with turnover above £10m