What might the implications of Great Britain’s vote to leave be from a VAT perspective?
As the UK must give the European Council notice of intention to withdraw, there is likely to be a period where current law applies, both EU and UK law whilst a Brexit agreement is negotiated. All treaties would cease to apply from entry into force of the withdrawal agreement, or two years from the date of notice. We do not expect a considerable change for at least 2 years.
Which areas of VAT law might change in a UK free from the EU VAT directive?
In the short term at least, it is unlikely that the UK government will rip up VAT law – VAT accounts for >20% of UK tax revenues, is a relatively stable, understood tax – and thereforewholesale changes are unlikely.
In the simplest terms though, EU law would cease to apply after the exit. As UK VAT law implements EU law, this would fundamentally alter the basis on which UK VAT law is in place. Relevant EU law that would cease to apply would include:
i) the VAT Directive;
ii) VAT regulations;
iii) General principles of EU law;
iv) CJEU case law
The Value Added Tax Act 1994 would continue – although HMT would have much greater scope to amend this than in the past.
The UK would have freedom to amend its exemptions – for example in financial services and insurance (something which the EU has considered but not yet done);
The UK could change its VAT rates, introducing lower rates for specified items or bringing more items into zero-rating;
The UK could change its rules regarding place of supply i.e. where transactions are taxed, though we consider this less likely as it might lead to double-taxation, or non-taxation – either of which would be undesirable.
What about other Indirect Tax reporting?
EC Sales Lists and Intrastat reporting would, at least in principle, not be required. Given the use of these in anti-fraud measures, it is possible that the UK as a large trading partner of the EU might wish to maintain some of these measures as part of any exit negotiation.
Some elements of UK VAT law that deal with intra EU trade may change. For example, provisions that deal with trade between businesses in EU Member States may be amended – for example to replace dispatches / acquisitions and references to other Member States when determining the place of supply.
It is however possible that Parliament may seek to maintain the current concepts of trading between the UK and other Member States so as to leave the status quo intact (although absent the overarching EU law).
In the Financial Services space, for example, HMT/HMRC would need to decide whether to allow input VAT recovery in respect of specified supplies where the counterparty is in another EU Member State (where recovery is not allowed today).
Which industries might be affected most from a VAT perspective?
Financial services – notwithstanding that as an industry we expect FS to be generally impacted, the Financial Services industry has, from a VAT perspective, a number of exemptions applicable that are driven from EU law.
Travel – tour operators who account for VAT under an EU scheme, the Tour Operators Margin Scheme (TOMS) would need to understand how to account for VAT going forward. As the TOMS is an EU wide scheme, we would expect that this would need to be amended
Industrial products / Pharma – these industries are likely to be the largest movers of goods and might therefore be impacted by changes to the status of acquisitions / dispatches to imports / exports. Aligned with this there may be Customs duty impacts.
Technology, Media and Communications – changes to the mini one stop shop simplified mechanism for the accounting for VAT on sales of Telecoms, Broadcasting and Electronically Supplied Services sold to private consumers, may well affect clients in these industries.
Retail / consumer – any clients in this sector that make use of distance sales thresholds or registrations may well be impacted by a change in rules in respect of this simplification. This may make it harder for them to sell their products to private consumers in other EU Member States.This sector will also likely need to consider impacts on their supply chains of a change in status of acquisitions to imports.
What businesses should consider the potential impact for VAT purposes of the Brexit now?
First, you should identify how important the EU is to your business from a VAT perspective – for example:
Do you trade extensively with parties in other EU Member States?
Do you have a footprint themselves in other EU Member States?
Do you sell to private consumers in other EU Member States?
What is your manufacturing / supply chain footprint in the EU?
Some elements of UK VAT law would need to change from the date of withdrawal – it is expected that the government would consult on these changes, but areas where consideration would need to be given to amending UK VAT law would include: The above mentioned TOMS, Tour operator’s margin scheme; Mini One Stop Shop –this is an EU wide scheme for VAT on telecommunications, broadcasting and electronically supplied services supplied to private consumers in the EU as well as Distance sales – this is an EU law provision that allows traders to charge their local ‘home country’ VAT on goods that they sell and deliver to private consumers in other Member States. Only once a threshold is reached is a local registration required. Trade from a non-EU country into an EU country does not have this measure and instead, import VAT (and duty if any) is due at the border from the customer.
What will happen to existent claims that are based on EU law? What sort of claims might these be?
Examples of what we consider to be EU law based claims are:
o Compound interest;
o Leisure claims;
o Various others
The initial starting point – at least until the point that more detailed information regarding the form of an exit is available – should be to maintain all claims.
It is worth noting, that regardless of the form of an exit, what are currently considered to be EU law based claims may still be available – as it is possible that UK common law principles may read across to existing domestic remedies or if not already, that UK common law principles may develop to allow such claims to subsist.
And as mentioned above, claims in respect of past transactions and VAT paid in the past should remain available as it is unlikely that the European Communities Act 1972 will be repealed retrospectively.