Indirect tax implications of a Brexit vote on VAT
05 July 2016
As we briefly mentioned in our last post on the indirect tax implications of Brexit, the wider outcomes of the referendum vote to leave the EU are yet to be revealed it is likely that VAT will be impacted.
As a tax driven from EU VAT Directives, the basis on which UK VAT law exists will be fundamentally altered, but this does not mean that UK VAT law will itself have to be ripped up and replaced with something new.
The core of UK VAT law, the Value Added Tax Act 1994 and its associated regulations will likely (i.e. unless the government chooses otherwise) remain, subject to some adjustments that will have to be made where VAT arrangements are premised on the UK being an EU Member State.
Depending on the precise terms of the negotiated exit there may be much greater flexibility for the government to amend UK VAT law, without the constraints of the over-arching EU provisions, but at the moment we can only speculate as to what the government might wish to do with this new found freedom. Areas that the government may wish to make changes could include:
- amending its exemptions – for example in financial services and insurance (something which the EU has previously considered);
- changing its VAT rates and reliefs, whether introducing lower rates for specified items or restricting access to current exemptions; and
- changing its rules regarding place of supply i.e. where transactions are taxed. We consider this less likely as it might lead to double taxation, or non taxation – either of which would be undesirable.
Some elements of UK VAT law will need to be amended to take into account our new status as a non-EU country. We expect that the government will undertake a full review of UK VAT law provisions to identify these areas and to plan for any required legislative changes at a UK VAT law level. As part of this we would expect the government to consult on the impact of changes on business in these areas. However, areas where amendments will likely be needed include:
- the tour operator's margin scheme - effectively an EU simplification measure;
- the Mini One Stop Shop –this is an EU wide scheme for VAT on telecommunications, broadcasting and electronically supplied services supplied to private consumers in the EU – there are versions of the simplification for both non-EU businesses making sales into EU consumers and for EU businesses making sales to consumers in other Member States;
- distance sales – this is an EU law provision that allows traders to charge their local ‘home country’ VAT on goods that they sell and deliver to private consumers in other Member States. Only once a threshold is reached is a local registration required. Trade from a non-EU country into an EU country does not have this measure and instead, import VAT (and duty if any) is due at the border from the customer.
- elements of UK VAT law that deal with intra EU trade. For example, provisions that deal with trade between businesses in EU Member States may be amended – e.g. to replace dispatches/acquisitions and references to other Member States when determining the place of supply. It is however possible that Parliament may seek to maintain the current concepts of trading between the UK and other Member States so as to leave the status quo intact (although absent the overarching EU law). In the Financial Services space, for example, the government would need to decide whether to allow input VAT recovery in respect of specified supplies where the counterparty is in another EU Member State (where recovery is not allowed today).
So, what about the impact of EU law ceasing to apply?
In this area, there are currently more questions than answers, but we think the key questions that need to be answered over the coming months and years are:.
What will happen to the Indirect Tax treatment of transactions in areas where there is currently directly applicable legislation – in essence Regulations? Businesses will need to consider whether any of their tax treatments rely on this directly applicable EU law as its removal could potentially leave gaps in UK law (versus what exists today). We expect that as part of an overarching legal review, the government would look at this and seek to enact either new domestic provisions, or would give guidance as to how businesses should address those areas previously covered by regulations.
What will happen with respect to case law and interpretation? How will courts construe parliamentary intention when interpreting statutory provisions that were put in place at a time when EU law was in place? This could give rise to significant uncertainty for businesses and the courts when trying to establish the correct treatment of a transaction(s). For example the approach to single and multiple supplies has been driven by the CJEU judgments on that issue.
What will happen to EU law rights that were accrued while the UK was a member of the EU? Whether these will be protected upon the exit is likely to be dependent on the steps taken by Parliament to effect the exit and the way in which the judiciary interpret statutory provisions, identify and give protection to domestic rights.
What will happen to currently unresolved VAT claims that are based on EU law? Until the date and legal form of the exit are known, it is difficult to advice upon the likely impact on such claims. However, we would advise businesses with such claims to maintain them.
We will explore some of the questions and other implications that arise further in a series of blogs in the coming days. Keep up to date with all global indirect tax developments at GlobalVATOnline.
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Johnathan C Davies
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