The proposed bill, revoking the 1972 European Communities Act, will convert existing EU laws which have direct effect in the UK and transpose them into domestic legislation until such time as they are subject to subsequent amendment or removal.
However, the European VAT directive is already part of UK law so initially there will be limited change. This EU model has been used as a benchmark and with an increasing focus on worldwide VAT systems; many emerging economies are now introducing VAT along similar lines to that established in the EU.
With this wide application of VAT across the globe, and the relative importance of VAT to the Exchequer – accounting for around 17 per cent of all government receipts – it seems unlikely that VAT will be abolished in the UK following Brexit.
However upon secession, the jurisdiction of the Court of Justice of the European Union would cease completely in relation to UK VAT matters, so the final arbiter of VAT appeals would rest with the UK courts. This raises question marks over the direct effect of some over-riding principles of European law as applied to VAT, including the principles of fiscal neutrality, equivalence, equal treatment and legitimate expectation.
This is an important issue which should not be overlooked as, under the terms of the Act of 1972, it has always been clear that it is the duty of a UK court, when delivering final judgment, to override any rule of national law found to be in conflict with any directly enforceable rule of Community law. The removal of any right to rely on these EU principles will have far reaching consequences for all UK taxpayers.
Operating in the ‘single market’
It has long been recognised that the harmonisation of VAT across member states is an essential element in the achievement of an effective single market.
While it is possible that the UK will negotiate the terms of a free trade agreement with the EU, if the UK’s negotiation with the EU sees the end of the UK’s participation in the VAT union, the movement of goods and services between the UK and the EU, is likely to add complexity to administration, increase costs, and lose a number of intra-EU VAT simplifications.
For example, UK businesses may be asked to pay EU VAT on some services they receive from EU members in the future, with the process for recovering EU VAT incurred on costs from EU Member States being slower and more complex than the electronic system currently available.
Also, EU businesses selling goods to UK consumers will no longer be able to rely on the VAT distance selling rules. Instead, consignments would have to be cleared on entering the UK, with VAT and duty likely to be demanded from consumers as a condition of delivery.
While the Prime Minister may reject the choice between a hard and soft Brexit as a 'false dichotomy', there are some real VAT and tariff issues to be addressed if British businesses and consumers are to have freedom to trade and operate outside a VAT and customs union.
If you would like to discuss any of the issues raised, please contact David Wilson or your usual RSM contact.