VAT in a post Brexit environment
Charlotte Barbour outlines tax policy recommendations put forward by ICAS regarding VAT in a post Brexit environment.
What has ICAS recommended?
Convert all existing VAT measures into UK law at the time of leaving the EU
Post-Brexit (after the implementation period), when the UK is no longer subject to EU VAT law, there is the potential for major changes to VAT. Whilst existing VAT law will be mirrored on Day 1 of Brexit, over time there will be no barrier to VAT being changed or even swept away. Changes could apply across the UK or could potentially involve some devolution of VAT powers. We are not referring to Northern Ireland, as full details of the arrangements with the EU are still to be finalised.
Allow time for ongoing VAT administrative changes to be fully embedded
VAT is an efficient tax that raises a significant amount of revenue. However, the legislation is complex, it is a much litigated tax, and we caution against any early significant changes in VAT after Brexit. There are ongoing administrative changes that need to bed in fully, including Making Tax Digital for VAT, the forthcoming VAT construction industry domestic reverse charge, and there will also be essential post-Brexit changes such as postponed accounting.
VAT simplification measures should be the priority after Brexit
Simplification of VAT is possible, as set out by the Office of Tax Simplification. ICAS believes that the OTS report identifies numerous aspects of the VAT regime which could usefully be simplified. As its report notes, whilst the UK remains within the EU there are constraints on what it can do. After Brexit, it should be easier to undertake radical reform; there may be a case for considering reform in stages, but ICAS believes that the priority should be simplification measures.
If devolution of VAT is a potential future option, there should be a careful assessment of the potential consequences
In a post-Brexit world, there is also scope to consider devolution of VAT powers within the UK. However, before adopting this approach, further work should be undertaken to inform decision making in three areas:
- First, VAT has various functions, including generating government revenues, encouraging or discouraging certain behaviours, and/or supporting the economy and its growth. There should be an examination of how devolution of VAT could affect these. For example, if VAT rates were to be cut by one administration, would this trigger cuts across the UK, which would nullify the competitive advantage and erode revenue? Or, would rate cuts instead boost economic activity for everyone?
- Secondly, an analysis of the burdens that could be imposed on businesses is essential. VAT is designed to collect revenue on the ‘value added’ at all stages in a production chain and is most effective across an integrated market. Devolution could lead to different VAT regimes, and hence to increased complexity and increased burdens on business. From the business perspective, it is therefore important to consider how the devolution of VAT powers could affect the efficiency of the UK single market and how any business burdens could be minimised.
- Thirdly, if devolution leads to different VAT regimes, it will also lead to tax planning. A competitive environment, from a tax perspective, encourages taxpayers to use the regime that will minimise costs. This may appear helpful initially but if all jurisdictions aim to be competitive it may lead to all their tax revenues being reduced. It also sends an ambiguous message in relation to tax avoidance.
A full analysis of the potential consequences of VAT devolution is needed to inform decision making.
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The recommendations in the ICAS Future of Tax paper were agreed by the ICAS Tax Board in 2020 and inform the work of ICAS Tax. They will be reflected upon and revised to reflect economic, social and political developments.
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