VAT, Brexit and a whole host of questions

By Jas Dhillon, senior manager (VAT)
020 7490 7766

When Brexit negotiations are completed and we officially leave the EU, there will be wholesale changes to the nation’s political, economic and social make up. Falling squarely within those political and economic changes is the UK tax system, and in particular VAT.

The reason that VAT is likely to be the most heavily impacted is because it is the invention of the EU. The UK VAT law and operation of the VAT system is underpinned by the EU VAT Directives, Regulations and decisions made in the European Courts of Justice.

This effectively means that a post Brexit UK government will be in a position to do whatever it wishes with regards to VAT. Whilst no-one can predict what that will be, this article highlights some of the key Brexit and VAT questions for businesses that we believe the UK government will need to answer.  

  1. Will UK businesses have to pay irrecoverable customs duty charges and VAT when we export goods to the EU? Currently, as members of the EU, we have free trade with other EU businesses, so, for example, a UK company selling its goods to business customers in other EU countries does not need to be concerned with paying VAT and Customs Duty. However, when we leave the EU, the sale of goods into the EU will be an export from the UK, rather than an intra EU community supply. It will still be free of UK VAT, but an export to, say, France, may be charged customs duty, as well French import VAT. 
  2. How will a UK business selling into the EU recover the EU country’s import VAT levy? Also, will it need to register for VAT in each EU country?
  3. Will a UK business buying from the EU suffer UK customs duty (which is an irrecoverable cost) and also pay import VAT (which should be recoverable)? Currently, if a UK business purchases goods from Germany, the UK business accounts for acquisition tax, which is an ‘in and out’ self accounting mechanism and as long as the business is able to recover VAT in full on their costs, there is no tax loss or cash flow disadvantage. In a post Brexit UK, the duty could represent a real cost.
  4. Similarly, will the UK business suffer the cash flow disadvantage of paying out the VAT before subsequently reclaiming it?
  5. Following on from the above, will the change from intra community supplies to import/export mean that there will be an increase in administrative costs, i.e. clearing goods into the EU and completing the various documents and paperwork?
  6. How will EU wide accounting mechanisms work? At present we have systems like the Tour Operators Margin Scheme work (an accounting mechanism for taxpayers that buy in travel and accommodation and then package them up and sell in multiple countries) and the Mini One Stop Shop (an EU wide mechanism in place to account for VAT on electronic services supplied to non business customers). We may need to reinvent these systems post Brexit.
  7. Will the requirement to file EC Sales Lists be abolished? That could be a welcome reduction in red tape.
  8. Could the UK government decide to abolish the VAT system altogether?

Whilst Brexit negotiations continue and deals are discussed there will be lots of questions and far fewer answers; the one thing we are not going to have is any certainty on VAT, and much else besides. 

What we do know is that the day after we leave the EU, all EU legislation and case law will apply in the UK as it stood on the day that we leave. It will then be for the current and future UK governments to make changes to the VAT legislation as and when they see fit. It will be interesting to see what they do with their new found freedom.

Finally, whilst most of the questions we’ve raised are a matter for conjecture at the moment, we’re pretty certain about the answer to the last one. On the basis it generates 22% of the government’s revenue, we are quite certain that VAT will continue in some form or another.

Understanding which Brexit related changes will, and will not, have an effect on your business is an important first step in preparing for Brexit. To discuss the impact of Brexit on your business from a VAT perspective, please get in touch and speak to our VAT specialist Jas Dhillon

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