The effect of Brexit on the UK’s Value Added Tax (VAT) system had not, until recently, begun to garner much press attention. Aside from the soporific effects on most people of any reference to tax or tax law generally, let alone VAT, it is also a highly technical area that few people understand in depth.

Lawyers are used to seeing other people’s eyes glaze over with boredom and confusion whenever we start to discuss our work. So when I recently participated in a panel on the theme of Brexit and 'how the rules may change' at the Norwich Aviation Academy, I was stunned by how interested in VAT the audience seemed to be.

In the immediate aftermath of the referendum, few practitioners or commentators took seriously the idea that Britain would implement any substantive changes to VAT law. The current laws are well-established and everybody expects the Government to seek to maintain the status quo, since VAT alone accounts for some £120bn or more of revenue.

The longer, however, that Brexit negotiations have gone on without agreement, the more realistic a possibility a hard Brexit appears to be, including the Government’s avowed 'red line' pledge to 'take back control of tax' from the European Union. When they talk about “taking back control of tax”, it is VAT that they are getting at. Joining the EU’s common VAT area is an essential part of joining the EU, as the system is designed to enable frictionless trade between member states. The EU sets the guidelines as to what is and is not subject to VAT, as well as a minimum (15%) standard rate, reduced minimum rates of at least 5% and certain derogations to allow specific products to be zero-rated.

Faced with the possibility of Britain leaving the EU without a new agreement on VAT, rising concern has been expressed in the press that this could lead to delays at the border, cashflow implications and EU VAT registration for businesses doing business on the continent. Until an agreement is reached, or is not, this is all speculation, but there are plenty of businesses with very legitimate concerns as to the implications of the UK potentially leaving the VAT area.

Unless the Government puts in place a more generous and wide-ranging VAT deferment system, or allows for the postponed payment of VAT, many companies importing from the EU could face significant cash flow issues funding additional costs at the time of import. Exporters too, could face significant new costs and compliance obligations, such as potentially setting up VAT registrations or branches in the EU. This is in addition to the very real risk of delays at the borders affecting supply chains and the movement of people in and out.