I’ve recently been appointed to act on behalf of one of my continental clients for Irish VAT. The process has been lengthy, as these things usually are, but no problems or unexpected delays. But it has got me thinking about Brexit, VAT and what happens next for VAT in more practical terms and the changes we’ll have to deal with after the ink has signed on the dissolution documents.
The thing about VAT, of course, is that it is the original tax of the “Common Market” and each new member state is required to introduce the VAT system as a requirement of EC law. In the UK, it replaced “purchase tax”. It was still a very new tax when I joined HM Customs & Excise as a VAT officer in 1982. But everything about the tax is built around the premise that the UK is a member of the EC. So how will things change when (or if??) we leave the EC?
So what happens to VAT?
From the political perspective, the government is unlikely to withdraw or change the tax in any significant way because the operation of the tax is so closely linked to the operation of the Single EC Market. If we want to retain access to the Single Market, we need to retain the VAT system so that even if we are no longer a member of the EC, we can operate on the basis of reciprocity – i.e. EU businesses will be able to benefit from reciprocal VAT practices.
From a tax collection perspective, I suspect that the government won’t really do much to change the tax rules nor the administration and collection. VAT is one of the largest sources of revenue for the government, second only I believe to income tax. However it’s significantly less expensive to administer and collect because it’s the original self-assessed tax and VAT registered businesses do most of the work. Like any tax, it’s susceptible to fraud, especially at the retail end of the chain, but for the most part the VAT invoice/chain of supply process provides a very effective self-policing arrangement.
European Court of Justice and UK sovereignty
However I’m sure that HMRC will be pleased that they won’t have to follow decisions from that frustrating European Court of Justice. The fact that the final arbiter of our tax systems is a “European” court is just one example of how UK sovereignty has been affected by our membership of the European Union. Of course, tax decisions don’t grab the headlines in the same way as say the right to remain in the UK by certain high profile individuals, but they affect many aspects of our lives.
It’s not a completely black and white picture though – HMRC might have been frustrated at having to accept the exemption for non-members sporting fees in 2014, but they definitely appreciated the validation of their anti-avoidance approach when the ECJ upheld the Halifax ruling some 14 years ago. Either way, it opens the doorway for HMRC to not only run the administration and collection of the tax, but to influence the rules themselves by working with UK government, who will have the final say on policy.
So what will it be like when we’re not a member of the EC?
But what will it be like in practice? If your business is wholly UK, then chances are that you won’t notice any significant difference to your VAT affairs. But for any businesses whose trade includes European sales or purchases, whether goods or services, then there are bound to be some significant changes. Here are a few off the top of my head:
- The VAT registration arrangements for UK businesses supplying B2C digital services under the MOSS scheme
- UK consumer may benefit by not paying VAT on certain services and good from EC suppliers
- Acquisition VAT for UK importers for EC goods – UK importers may no longer benefit from this procedure
- Intrastats, European sales lists and boxes 8 and 9 of the VAT return – how would these reporting mechanisms change?
- UK suppliers of services may have to register for VAT in EC member states if the intra-EC “reverse charge” VAT process is no longer available
Of course these are just the obvious issues and I’m always interested to hear of any other implications you may have identified, particularly if they will affect your business or your clients’ businesses.
Either way, the next few years will be a very interesting time for VAT.
Marie
October 2016