Brexit: what happens to VAT?

Published on
4 min read

Brexit will have many tax implications but what about the UK’s current VAT system, given that VAT is an EU tax adopted by all member states, is governed by EU regulations and Directives and subject to the jurisdiction of the European Court of Justice.

Brexit will have many tax implications but what about the UK’s current VAT system, given that VAT is an EU tax adopted by all member states, is governed by EU regulations and Directives and subject to the jurisdiction of the European Court of Justice (“ECJ”).

What might happen?

Following Brexit, technically the UK could abolish VAT or create its own entirely new sales tax. However, this is extremely unlikely to happen:

  • The current system of VAT generates around £100 billion in annual revenues, and is too valuable a source of income to risk wholesale changes
  • The costs and confusion to UK business would be too burdensome, especially at a time of significant economic uncertainty

While a complete re-write won’t happen, significant changes to the UK’s system of VAT are inevitable – not least because goods transferred within the EU will become imports and exports for VAT purposes as between the UK and the remaining members of the EU.

Many commentators are predicting that there may be lobbying on extending the UK’s system of zero-rates (at present, the UK has no freedom to do this). It is also conceivable that the rates of VAT within the UK might change, though it should be noted that the UK’s current VAT rates are reasonably competitive.

One of the most interesting aspects to watch in the years following Brexit will be the extent to which the UK’s separate system of “VAT” does or does not develop in tandem with the EU’s system, in particular as regards decisions of the ECJ.

Technically, ECJ rulings on VAT matters will no longer be binding in the UK – but it seems inconceivable that absolutely no regard will be had to them from the moment the UK’s membership of the EU ceases:

  • Virtually all domestic VAT cases at present (certainly those of any serious financial or precedent value) refer to prior ECJ decisions – how could that possibly be unwound?
  • Litigation involving referrals by UK taxpayers to the ECJ may be ongoing when Brexit actually happens – what will happen to them? Will they benefit from some kind of transitional arrangement?
  • What if post-Brexit ECJ decisions develop the approach to pre-Brexit ECJ case law, which has already been applied to the VAT affairs of UK taxpayers?
  • How will EU concepts, like fiscal neutrality, be applied in the UK?

It should also be noted that extensive changes to the UK’s system, diverging from the EU’s approach, could lead to significant risks of either double taxation or no taxation (with supplies either caught by both the UK’s and the EU’s rules, or else slipping through the fiscal gap created by the two systems pulling too far apart). Another reason why it is likely that the UK will follow the EU’s approach on VAT in most material respects for some time following Brexit.

What should I be doing now?

At this early stage, while it is clear changes will need to be made, the precise nature and scope of those changes in not clear.

The best practical step would be to task one or two key individuals within your organisation to subscribe to any VAT and Brexit updates. Changes will develop slowly over the next two or three years, and will likely be trailed in advance for consultation. The more advance notice an organisation has of the approach HM Government intends to take, the better it can prepare itself.

Organisations which make or receive a significant number of intra-EU supplies (in particular those which currently benefit from any EU “one-stop shop” for supplies) may be particularly impacted by Brexit. They should begin to look at their systems and compliance procedures now, to try to identify areas that will inevitably have to change when the UK’s membership of the EU ceases. That may include having to register for VAT in various EU jurisdictions.

Who do I contact?

The Mills & Reeve tax team is here to help if you have any concerns about the potential impact of Brexit on your tax affairs. In the first instance, please contact Kevin Lowe or Matthew Short.

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