Nicholas Hallam, chief executive of Accordance, the International VAT specialist, explains what effect Brexit will have on VAT and EU tariffs
VAT is Europe’s tax gift to the world. There is disagreement among the experts about who can take the credit for its invention (the French claim it was Maurice Lauré’s idea in the 1950’s; the Germans insist that they devised it decades earlier), but no one doubts its European origins, or its enormous and rapid success.
The United States is the only OECD member not to operate some form of value-added type tax. In this respect, at least, the EU has been at the forefront of globalisation.
The UK implemented VAT in 1973, as having a VAT system was one of the conditions for entry to the EU, which had been negotiated by then Conservative Prime Minister Edward Heath.
The European Commission believed that a consistent and ideally harmonised indirect tax framework is a prerequisite for an efficient EU marketplace and a more deeply integrated Europe.
Given this provenance, some fear that VAT in the UK may be a casualty of Brexit, as our departure from the union presents an ideal opportunity to establish a system that meets the UK’s new needs.
Some Brexiteers have talked about a desire for a ‘Singapore style’ UK economy: a highly attractive low tax, low regulation hub for businesses wanting an alternative destination to the EU for their European home.
The trouble for this vision is that even Singapore has a VAT system (Goods and Services Tax). VAT is generally recognised as the most efficient of all major taxes.
The primary reason for VAT being resisted in the US is that Republicans consider it too effective a means of tax collection, it gives the state unreasonable power. But in most places, governments celebrate VAT because of this and as it becomes harder to collect corporate and income taxes because of globalised mobility, VAT dependency is on the increase.
HMRC now collects more than £100 billion worth of VAT annually. It will take a brave Chancellor to place that income stream in jeopardy. The UK government is also unlikely to tamper with the structure of the framework inherited from the EU, because if principles diverge too greatly from the continental framework, risks of double and zero taxation will be created and there is a limit to how much control can be taken back.
What changes can be expected?
In terms of the practical changes that UK businesses will have to manage post-Brexit, the most significant VAT related matter will be non-applicability of the EU VAT Directive in the UK.
Currently, the VAT Directive is the primary piece of legislation regulating VAT in the UK – we have the UK VAT Act, but that is derived from the pan-EU rules.
Post Brexit, the UK’s own rules will be the sole authority. As these rules are based on the EU’s framework, initially there may be no significant changes to how VAT is applied, however, over time we may see the emergence of distinctive VAT landscapes in the UK and EU, with differing rates being distinguishing features.
Imports and Exports
There will be some immediate and inevitable consequences for businesses once the UK is outside of the EU.
Significantly, any movements of goods to and from the EU will start to be classified as exports and imports, as opposed to the current treatment as ‘intra-community’ despatches and acquisitions.
Imports to the UK will become subject to import VAT and because acquisitions from the EU don’t currently attract a VAT charge, many businesses may see a requirement for one-off cash payments to fund this import VAT.
Duties and Tariffs
Businesses which export to the EU will need to consider whether any of their products will become subject to duty charges.
Currently, there is free trade within the EU, so tariffs do not have to be considered. Duties are non-recoverable, so where they apply, they will represent a cost to businesses.
It is not known at this stage if the UK will impose similar duties on imports from the EU, which would even up the position, or if a deal might be done where the UK retains some of the benefits of the single market and customs union.
Goodbye to Intrastat
One positive from this change of classification is that UK businesses should no longer have to submit EC Sales Lists and Intrastat declarations in respect of UK outbound or inbound trade.
These reports are intended to track the supplies made in the EU but when the UK is outside of the EU, they will no longer be relevant. However, UK businesses will still be required to meet these reporting requirements where activities take place within the jurisdiction of the EU.
UK businesses selling goods directly to consumers in the EU, for example via online marketplaces like Amazon, will no longer be subject to distance selling rules, which may reduce the number of overseas VAT registrations they require. However, that gain could well be balanced by a need to set up warehouses in the EU to better fulfil orders, which would mitigate the potential delays associated with imports.
Little Impact on Services
From a VAT point of view, services will not be impacted as significantly as the supply and movement of physical goods. This is because in 2010, changes to EU VAT rules eliminated the need for VAT to be charged on most business-to-business transactions.
There will, inevitably, be many VAT issues for UK businesses to consider once Brexit occurs. Some will be positive while others may have negative consequences and there might be changes that cannot be predicted.
Businesses need to be prepared for what could be sudden and rapid change, by fully reviewing and understanding current EU supply chains and cross-border obligations.
EU tax authorities are likely to look closely at UK firms, even in the run up to Brexit. Businesses also need to ensure that once there is clarity, they are ready to go forward as efficiently and quickly as possible to minimise risk.
Nicholas Hallam is chief executive of Accordance.