The recent referendum in favour of the UK leaving the EU will mean that UK VAT registered organisations may face greater VAT compliance.
This briefing note highlights some of the potential issues that may arise for VAT registered organisations, should the UK follow the referendum result and implement Article 50 of the Lisbon Treaty. Once this is triggered, the process to leave the EU could take up to two years. This time will be taken up by negotiations between the UK and the remaining 27 members of the EU.
VAT is an EU tax
The UK has its current VAT system by virtue of being an EU Member State. Given that VAT accounts for around 22% of the tax raised by the UK Treasury – and contributed approximately £115bn in 2014/15 – it is unlikely that VAT will be abolished and we do not expect major changes.
However, a post-Brexit UK Government will be free to amend the VAT system without the current EU VAT Directive restrictions. This may lead to additional compliance requirements and greater complexity, particularly importing and exporting with EU suppliers and customers. It will also be possible for the UK Government to abolish VAT and introduce a goods and services tax instead.
Change in the relevant legislation
As a Member State, the UK currently follows EU legal precedence via the EU VAT Directive as well as judgements of the Court of Justice of the European Communities (CJEC). Following exit from the EU, VAT law will be governed by the Value Added Tax Act 1994; this Act will need to be amended to deal with elements that will no longer be dealt with by the EU VAT Directive and CJEC decisions.
In terms of legal precedence, the CJEC will no longer be the highest Court for VAT decisions, although it is likely that EU judgements will still be referred to in legal actions.
Possible changes to VAT rules
At present, within the EU, the standard rate of UK VAT has to be a minimum of 15% (there are also two other additional rates that have a minimum of 5%). After leaving the EU, the UK will be free to set rates as it chooses. For example, the restaurant and tourism industry has consistently lobbied for lower VAT rates and the referendum campaign suggested that the VAT rate on domestic energy bills would be reduced and the VAT rate on sanitary products would be reduced to nil.
Additional Customs costs
UK businesses currently have Intra-Community Trading Status, whereby they can sell products and services VAT-free to business in other EU states. This will no longer be the case after Brexit; such sales will be treated as imports in the destination country and subject to VAT in that state. The costs of going through these additional Customs procedures are likely to be borne by UK traders; we have seen one estimate that these costs will amount to approximately £3 billion. There will be similar costs for EU businesses exporting to the UK.
This will have an impact on accounting systems, though these should already be equipped to deal with imports and exports to third-party countries.
Less efficient EU VAT recovery
UK businesses currently benefit from an online system for ‘8th Directive Reclaims’ – VAT refunds from other EU member states in which the businesses are not VAT registered.
After Brexit, it is expected that UK businesses will have to file paper claims in the same way as other non-EU businesses, assuming there are agreed reciprocal tax refund systems. These are much slower than the online system, and more easily challenged.
VAT registration throughout the EU
Currently, UK businesses that sell goods online do not have to register for VAT in each EU state in which they have customers thanks to ‘distance selling thresholds’. Following Brexit, UK businesses may have to register in multiple EU member states in order to carry on trading with EU customers.
The EU is a customs union so Customs Duty applies to all goods entering the EU. Norway and Switzerland are part of the EU Customs Union (through EEA and EFTA respectively) despite the fact that they are not part of the EU; it is possible that the UK will assume similar status however it is unclear at this stage which route the UK will take. It is hoped that the UK will have such an arrangement; otherwise a customs tariff will mean that there will be additional costs for UK businesses importing goods from the EU and vice versa.
If you have a query about the VAT impact of Brexit, please get in touch with Iain Masterton at firstname.lastname@example.org or call 0131 558 5800.