Brexit tax: The future of UK VAT
Value added taxes are well established in many countries, explains Donald Drysdale, and it is extremely unlikely that the UK would no longer have a value added tax after leaving the EU.
Why the UK will retain a value added tax
Our existing value added tax (VAT) is essentially a European tax, so it might be thought that the UK will abandon it on leaving the EU. However, in my view this will not happen.
VAT is levied throughout the EU and is a key feature of the European single market. Even if the UK is successful in leaving the EU in a political sense, we might remain as a member of the single market with obligations to continue complying with EU VAT law.
Alternatively the UK might gain more flexibility by retaining access to the single market through a negotiated arrangement. We might achieve this, for example, through membership of the European Free Trade Association (EFTA), where we would probably fall outside EU VAT law. Nevertheless, a value added tax of some kind will almost certainly remain in place.
Similar value added tax regimes exist worldwide - in 135 non-EU countries, and in all OECD member countries except the USA. Although the UK is planning to leave the EU, we exert significant influence over indirect taxes at the OECD and this is likely to continue.
A value added tax meets modern fiscal requirements. In recent years most developed countries have shifted their fiscal balance, relying less on direct income taxes and more on indirect consumption taxes such as VAT, and this trend is expected to continue.
In March 2016 the UK’s Office for Budget Responsibility confirmed that VAT remains the government’s third largest revenue raiser after income tax and national insurance contributions. In 2016/17 VAT was expected to produce £120bn - or 18% of total government revenues.
From the government’s perspective VAT is a relatively efficient tax, relying heavily on businesses to act as unpaid tax collectors. No doubt this would still apply if we were to relinquish membership of both the EU and the single market, though the UK would then be free to make changes to its value added tax regime without EU constraints. It is unlikely that the UK would have the resources or inclination to legislate for a new value added tax and therefore it is probable that the existing VAT would remain in place, broadly unchanged.
Possible VAT changes
Until the outcome of Brexit negotiations are known, it is impossible to predict what changes (if any) might be made to UK VAT once Brexit finally takes effect.
At one extreme, the UK could remain in the single market, with no changes to VAT; at the other, we could cease to be a member of the single market (whether or not still having access to it as, say, a member of EFTA), but outside the EU VAT area, and the VAT rules on supplies of goods and services between the UK and continuing EU member states would be fundamentally changed, with the following possible consequences.
EU VAT law would cease to apply in the UK. The Supreme Court would supplant the European Court of Justice (ECJ) as the UK’s court of last resort on VAT matters, though it might still be influenced by ECJ rulings on points deriving from EU law.
Intrastat, the EU’s system for collecting statistics on the trade in goods between EU member states, would no longer apply to arrivals of goods in the UK and despatches of goods from the UK - simplifying VAT returns for many VAT-registered businesses.
In a further simplification, the requirement to submit EC Sales Lists to HMRC would be abolished. This currently requires UK VAT-registered businesses to provide information about their supplies of goods and services to VAT-registered customers in all other EU member states.
Balanced against the above two simplification measures, new import and export rules would apply for supplies of goods and services between the UK and EU member states, together with changes to the duty deferment facility to cover import VAT on imports from EU member states. These would introduce added complexities for UK businesses trading with Europe.
UK businesses required to register for VAT in EU member states - where, for example, they hold trading stock – would have to appoint fiscal representatives locally to deal with their VAT returns.
The distance selling rules would change, with businesses no longer charging VAT to customers in EU member states; the distance selling thresholds for member states would then have no continuing relevance for UK businesses.
Under the special VAT rules for supplies of broadcasting, telecommunication and electronic services, UK businesses would need to account for VAT on supplies to non-business customers in EU member states, as they do for such supplies to the rest of the world. They would need to either use the non-EU Mini One Stop Shop scheme or register for VAT in each affected country.
The tour operators’ margin scheme might be altered or abolished, though it seems unlikely that all travel to destinations in EU member states would become free of UK VAT.
Currently it is relatively easy for UK businesses to recover overseas input VAT incurred in EU member states, but this would probably become more difficult.
It is almost certain that the UK VAT rules will remain unaltered until Brexit finally takes effect. Thereafter, even if the UK were to leave the single market and no longer have access to it, we would probably retain key aspects of existing VAT law, with changes confined initially to aspects affected by EU or non-EU status.
If the UK was no longer a member of the single market and we were therefore outside the EU VAT area, wider changes might follow. EU constraints would no longer prevent the UK government from responding to lobbying for changes such as reclassifying supplies as liable to VAT at a reduced or zero rate - for example, domestic fuel. Such changes might be welcomed by consumers but could add further complications for VAT-registered businesses.
The Brexit vote has triggered an economic shock. In our changed circumstances the new Chancellor has already spoken of ‘resetting’ the UK’s economic policy, and he must be assessing all his options. Although not widely expected, a change to the standard rate of VAT could be made even before Brexit - and the existing ‘tax lock’ would not prevent an increase.
Article supplied by Taxing Words Ltd