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Brexit: What it means for the UK VAT system

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Written by Robert Facer is VAT director at accountancy firm, Menzies


THE UK’s DEPARTURE from the EU will have significant VAT and customs implications for many businesses and over the next two years or so, it will be important to plan ahead as the details of our new trading relationships become clear.

While most of the changes are likely to bring increased uncertainty and complexity, at least in the short term, there may also be an opportunity to change things for the better.

One of the conditions of EU membership is to operate a common VAT system, based on EU VAT law. Leaving the EU means that the UK will be free to change its VAT rules, or even scrap them altogether. However, given that VAT is the UK’s second-biggest source of tax revenue, we shouldn’t expect drastic cuts and we can safely assume that VAT is here to stay in some form or other.

After exiting the EU, the government will be free to introduce new VAT rates for certain goods or services, which is not currently permitted under EU law.  The government is likely to take the opportunity to reform specific areas of VAT law which are currently problematic.  For example, the VAT rules for the financial services and insurance sectors are in desperate need of an overhaul, which is something the EU has been trying to do for many years, without success.  In particular, it might be possible to reduce irrecoverable VAT, which has long been a bone of contention for businesses in these sectors and any decision to make it possible to reclaim VAT on costs linked to doing business with EU member states could give UK firms a competitive advantage. Given the importance of these sectors to the UK economy, any move to simplify VAT rules and make them more business friendly could present a good opportunity.

Some aspects of the UK’s VAT rules will have to change, of course. On exiting the EU, the UK will lose its intra-community trading status. This will mean that goods being brought to market in the EU will be treated as ‘imports’ and ‘exports’, which will be subject to customs controls. Transactions will therefore be liable to import VAT and possibly customs duties. Overall, this will increase the complexity of trading relationships and result in additional costs for UK businesses.  However, there are things that the government could do to soften the impact, such as ensuring that our customs processes and procedures are easily accessible and highly efficient.

To counter the uncertainty surrounding our future trading relationships, businesses that regularly sell goods to EU customers may consider establishing a distribution hub somewhere in the EU, so that they can continue to benefit from the single market VAT rules. Establishing a base of this kind could significantly streamline customs-related costs and procedures.

The impact of Brexit on the services industry may be less pronounced, but there will inevitably be some changes to the UK VAT rules to contend with.  The upside is that for some sectors, such as financial services and insurance, post-Brexit VAT rules could bring unexpected benefits.

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