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Brexit and the impact on VAT and duty

Posted: April 19, 2016

Article by Greg Mayne, Director of Indirect Tax Services at Burgess Hodgson

On 23 June the UK votes on whether to remain a member of the European Union or to leave and look to progress on an independent basis.

Needless to say there are strong opinions being voiced on both sides of the argument, and emotions may cloud some of the underlying facts and figures. Whilst remaining as impartial as possible on the decision itself this article will hopefully set out a few of the facts regarding VAT and duty that may result from the UK leaving the EU.

Having a VAT system in place is a pre-requisite of EU membership, although there are apparently more than 140 countries around the world that have a VAT or similar sales tax in place. Joining the (then) EEC in 1973 meant that the UK had to implement its own VAT system, and in doing so it had to abide by the overarching VAT legislation that accompanied the implementation.

Whilst leaving the EU would allow the UK to dispense with VAT as a tax, the revenue raising ability that goes with it would leave a huge hole – VAT accounting for more than 13% of the total income to the Exchequer. For this reason it is likely that VAT will remain in the UK.

What would be possible is the ability to ignore the EU VAT Directive, and to implement VAT rates and exemptions without having to take account of, or comply with, the harmonisation and VAT limitation rates across the EU Member States. In particular the UK could continue to apply its existing zero-rates of VAT with impunity, and even extend them if it so wished. This could be of particular interest to those operating in the food and drink sector, and also in construction where varying rates of VAT can be dizzyingly complicated.

So we would be unlikely to abandon VAT as a tax, but would be more able to apply rates and thresholds as we wanted to.

Our ability to trade with our neighbours has formed a contentious element of the recent debates. Once again without involving ourselves in the emotion and conjecture of these debates, there are several underpinning facts that would come into play with any exit. For a start the ability to trade freely with a ‘Single Market’ would be removed, and for a business selling to the EU there may be additional costs and administration to take into account. One of these would be the immediate requirement for any UK business with a trading ‘presence’ in certain other EU Member States to have to appoint local fiscal representatives, as some countries place this obligation on non-EU companies. This would add a layer of administration as well as a financial implication in obtaining the necessary bank guarantees that accompany such representation.

As the fiscal border will be from the Channel onwards any goods moving to the EU will be liable to import VAT and potentially import duty as well. These charges will – depending on the arrangement for sale with the customer – impact upon the supplier and could mean a real bottom line cost or, at least, an additional administrative process for recovery. The implementation of thresholds for VAT registration would also disappear, and any business selling in one of the other remaining member states would be liable to register for VAT in that country.

Likewise any business buying in goods from outside the UK will have to take into account the potential cost of import VAT and duty at the point of importation.

Businesses incurring VAT on costs in other countries would have to apply for recovery on a different, more labour-intensive basis than they would currently, as they would be treated as an applicant from a non-EU member state similar to the US or Australia. This would potentially delay the ability to recover VAT on hotels, subsistence, etc. Buying in services from abroad may attract more non-UK VAT than currently as the intra-EC ‘general rule’ for ‘B2B’ supplies would disappear.

Suppliers of digital services who currently ‘enjoy’ the Mini One Stop Shop (‘MOSS’) process would be able to continue in the same vein, as there is a ‘non-Union’ version available to non-EU businesses.

The removal of the legal restrictions of VAT imposed by the EU membership would possibly be welcomed, however there are likely to be significant costs resulting in respect of importing and exporting goods and also making supplies of services to non-UK states, and incurring and recovering VAT on costs in those countries. As a non-EU country the ‘protection’ and benefit of negotiated duty rates would be lost, but arguably replaced by the freedom to negotiate on our own.

The current requirement to record and report on sales made to other EU businesses would be removed. The ‘EC Sales List’ and ‘Intrastat’ systems have long been felt as a burdensome, purely administrative measure for trade and statistical figures only, and failure to comply with their obligations have been strictly dealt with. Whilst the obligation as part of the EU membership would no longer exist, it is arguable whether an independent UK would still wish for businesses to provide similar trading statistics and whether they would be quite so strictly monitored and audited and whether non-compliance would be treated so severely.

Form-filling and reporting requirements may be curtailed following an exit, but may be balanced (or even outweighed) by internal reporting plus additional administration as a non-EU supplier/purchaser of goods and services.

All in all there are clearly some factual changes that would result in any exit, and some conjecture and varied opinion on the level of additional burden or benefit in losing administrative compulsion and trading on our own. Whilst some may say that a referendum may not be the best method for making this important decision it remains the case that on 23 June the people will decide.