In the referendum held on 23 June 2016, a narrow majority 52 percent of the British electorate voted to leave the European Union, triggering uncertainty for businesses.
The process of withdrawal is yet to begin, but the new UK Prime Minister has been talking to EU27 leaders in an attempt to shape the next steps. Upon triggering Article 50 of the Lisbon Treaty, the UK will begin a two-year withdrawal period1 to negotiate new arrangements with the EU27 and implement its exit from the EU.
The uncertainty as to what businesses should expect going forward continues, particularly with respect to the proposed relationship between the UK and the EU27 and the measures to be taken by the Government to preserve the UK's competitiveness.
What does Brexit mean for VAT?
Depending on the model agreed for its future relationship with the EU27, the UK might have more flexibility to shape its VAT rules and to focus on specific economic areas.
In particular, the UK might have significant freedom regarding rates, although in our view it is unlikely that the standard UK rate of 20 percent would be lowered following Brexit.
However, the UK could introduce more flexibility on reduced rates, exemptions and reliefs following Brexit. While it is not possible to predict the extent of these changes, the focus could be on measures that have been subject to debate and litigation in the EU (e.g. financial services, women's sanitary products, e-books and insurance), as well as on UK-specific areas.
Other aspects of VAT such as the MOSS, TOMS, input tax recovery and VAT grouping that are subject to EU regulation could be refined as a result of UK's legislative autonomy, although we would expect the majority of the existing VAT structure to remain.
UK Courts will no longer be required to follow the CJEU's interpretation of VAT law for periods following Brexit. In this respect:
- Brexit raises a risk of legal uncertainty in relation to existing and future CJEU decisions that could apply to UK VAT disputes. However, it may be good news in certain areas such as VAT grouping, where case law at an EU level has not been consistent (see, for example, Skandia, C-7/13).
- It is not clear if the UK Courts will continue to refer questions to the CJEU during the withdrawal period, although references continue to be made at present.
- Finally, it is uncertain what approach the UK courts would take after the withdrawal period with respect to disputes between taxpayers and HMRC in relation to transactions which took place before the withdrawal. Our current view is that it is likely that EU law will continue to be applied for these periods.
Cross-Border Transactions and Compliance
In practice, the supply of goods and services between the UK and the EU following Brexit will become import and export transactions instead of intra-community supplies. This could give rise to a significant cash-flow impact.
Having said that:
- Instrastat and EC Sales Lists would no longer be required, making VAT compliance simpler and less costly.
- Distance selling thresholds will no longer apply for small value exports to EU27 countries.
- The UK might introduce simplification measures to alleviate the immediate burden of import VAT (such as increased duty deferment facilities).
In addition, there is a risk of inconsistent VAT treatment for services between the UK and the EU27 that could result in double-taxation.
What to expect?
The UK's existing VAT legislation is likely to remain in place during the withdrawal period. The specific implications for VAT will depend in large part on arrangements for the UK's continuing relationship with the EU27.
Either way, while the UK might have more flexibility to set its own rules following Brexit, at least initially we expect only minor amendments to UK VAT law to reflect the change of status of transactions between the UK and the EU27 and, in order to maintain competitiveness, to alleviate the increased compliance burden for UK businesses.