The UK has voted to leave the EU. What does this mean for VAT?
One thing that’s certain is that leaving the EU will require a UK legal basis for VAT after the UK exits the EU. The changes could be sweeping or they might be minimal, but it seems unlikely the government will do away with transactional tax altogether as it is such a valuable source of revenue.
Will the rate of VAT go up or down, will any of the categories which are charged currently at zero or reduced rates of VAT become fully taxable in order to increase tax revenue? This includes rent, food, education, health, books, electricity and gas. The government promised not to increase VAT with its “triple tax lock” and it is hoped this promise is kept. It is only for this parliament though. Such issues therefore remain open for discussion and might not be determined until negotiations with the EU and discussions within the UK in the coming months and years become clearer too.
It is really only clear at this stage that transactions with other EU countries will be affected.
On exit being formalised, it is expected that goods bought into the UK from an EU country will be subject to import VAT and import duty. Goods exported from the UK to an EU country will be subject to import VAT and import duty in the EU country. It will be interesting to see whether the UK sees any need to increase the paperwork and delays associated with imports from EU countries. Might it keep things largely unchanged on the grounds it is working efficiently and only small tweaks to the system are required?
Goods moved from one EU country to another by a business registered for VAT in the UK is currently VAT-free for the UK business under a simplification known as triangulation. After exit, UK businesses can no longer expect to benefit from this EU simplification and instead can expect to be required to register for VAT within the EU.
A further EU simplification is distance selling of goods. Small amounts of sales to customers in other EU countries do not require the supplier to register for VAT in the customer’s country. If the UK is no longer part of the EU, either the customer will be responsible for import VAT and import duty, or the UK company will be required to register for VAT in the customer’s EU country.
Current rules on services bought and sold with EU countries should be largely unaffected. Supplies from non-EU countries (which the UK will be after its formal exit) are currently free of VAT in the hands of the supplier, whether they are in the EU or outside it. There are exceptions such as property related services, transport services, admission to events and others, which are subject to VAT within the EU. However this is already an exception to the current rules whether the supplier is within the EU or not and therefore no change is expected.
Rules for services which caused difficulties to digital traders, set by the EU and followed by the UK, might now be addressed. However it seems likely that the EU will continue to require suppliers of apps, electronic services, etc into EU countries to be registered in at least one EU country, no matter how small the supplier. Will the UK now be able to drive through its plans to introduce an EU-wide threshold to exclude small businesses?
Claiming VAT incurred in other EU countries is currently performed via a single portal on HMRC’s website, relying on the 8th Directive. It should still be possible to recover VAT incurred in EU countries after exit, but the 13th Directive would be relied on instead. It will no longer be possible to use the single portal via HMRC and there will be timing differences for claim deadlines which should be tracked by businesses which make such claims.
Reporting forms are largely in the UK’s own format and it is expected that the Treasury will want statistical information on VAT, as for any other tax. Are the EC Sales List and Intrastat forms needed or might they be consolidated with the standard VAT return?
Penalties too were also largely in the UK’s own format and have been brought into line with penalties for other taxes.
Returning to the change in legal basis for VAT in the UK, this could have an impact on certainty at several levels for some years. Appeals against decisions will no longer be referred to the EU as the highest level. Currently views are taken on the meanings of certain unclear parts of VAT law relying on over 40 years of clarifying decisions in EU courts. How will these be affected? It would create much uncertainty if all decisions referring to EU law were to be swept aside.
Of course, the changes to the VAT system could be more wholesale than expected. Whatever the outcome in the coming months and years of discussion, it will be an interesting debate. We will report as events unfold, follow the debate with us.
For further information and help on the effect of the UK exiting the EU on UK VAT, please contact the TaxDesk on 0845 4900 509 and ask for Kevin Hall or Vaughn Chown.