There have, understandably, been concerns expressed about the impact on indirect taxes following the UK’s decision to leave the EU. However we are, and shall during Article 50 negotiations, remain part of the EU. As such, the EU Principal VAT Directive (PVD) and Union Customs Code (UCC) will still apply until a successful exit has been negotiated.
Consequently, past and ongoing decisions of the European VAT Court would still have continuing application on the UK’s VAT rules; whether the UK is inclined to abide by these decisions may however be another matter. Knowing that it will be leaving the EU, will the UK decide to change VAT legislation affording holding companies a recovery of VAT, or give employers a recovery of VAT on pension funds investment costs? We would certainly hope so.
Post-Brexit a UK government, unencumbered by the constraints of the PVD, will of course have greater flexibility to change the UK VAT system, and there will no doubt be lobbying to extend the VAT zero-rate: ebooks and energy costs immediately spring to mind. However, it should also be recognised that, unfettered by the PVD, a future UK government could also impose VAT on services exempt from VAT that we currently take for granted, eg health, welfare, education, finance and insurance.
One certainty of the post-Brexit landscape is that there will be changes to the movement of goods between the UK and EU. The full extent of these changes will only become visible following exit negotiations and whether access to a single market free-trade arrangement can be reached with the EU.
Without access to the single market free-trade arrangement, UK importers and exporters will have to look closely at their EU supply chains and operations as margins and cash-flow will be impacted by import VAT and additional customs and excise duty. With the potential of increased compliance and reporting costs, and any upgrades required to IT systems to facilitate this, businesses will therefore have to determine how much working capital will be required to cover these costs.
HMRC will also face challenges, not only on whether to implement decisions of the European VAT Court, but whether its systems, and resources, will be able to cope with the increased compliance and reporting of more import and export transactions.
Most businesses trading with the EU will no doubt be undertaking initiatives to identify the impact of Brexit on their business; we can only ask that the UK negotiation team are open and transparent about their discussions with the EU thereby affording UK businesses an adequate transitional period to facilitate the changes required.
If you would like any further information on the points raised in this article, please get in touch with David Wilson or your usual RSM contact.