May 2nd, 2017 / Insight posted in Articles

VAT Update – Post Referendum VAT Issues

The Future for UK VAT

As a result of the referendum in favour of UK leaving the EU many UK businesses are likely to face greater VAT compliance. The UK will have to negotiate separation terms under Article 50 with the other 27 member states which may take up to two years.

Legislation

At present the UK is obliged to adopt and follow the EU VAT directive as well as judgements of Court of Justice of the European Communities (CJEC). Following exit from the EU, VAT law will be governed by the Value Added Tax Act 1994 and this will, in a number of respects need amending to deal with elements that are currently dealt with by the EU VAT directive and CJEC decisions.

However following the invoking of Article 50, at the end of March the Government published a paper called the “Great Repeal Bill”. The white paper confirmed that case law from the Court of Justice of the European Communities (CJEC) will continue to be regarded as relevant. Any issue in UK law that is derived from CJEC case law at the point that we leave the EU will be determinative and have the same precedent status as decisions made in the UK Supreme Court. A Customs bill will be introduced to deal with duties, and there will be a new Customs Declaration service. The white paper acknowledges the difficulties that will be faced in setting up a new duties regime.

One area that will need looking at is pension scheme management where a CJEC case recently determined that certain pension scheme management charges should be exempt. As a result HMRC announced that they would be changing our legislation but has not yet done so. We will have to see what happens about this which is just one example of CJEC decisions impacting on the UK.

Loss of Intra-Community Trading Status

Following exit from the EU, UK businesses will no longer have intra-community trading status so where they currently have B2B sales to businesses in other EU states which are currently VAT free, once the UK leaves, such sales will be treated as imports in the destination country and subject to EU VAT of that state. It is estimated that additional expenses involved in having to go through Customs procedures will be incurred by UK exporters and could amount to c £3bn.

UK VAT Rates

At present the standard rate of UK VAT has to be a minimum of 15% and with up to two lower rates with a minimum of 5%. After leaving the EU the UK will be free to set rates as it chooses. One area that is likely to be impacted is the VAT rate on sanitary products where the UK may well set the rate at zero. During the referendum campaign mention was also made about reducing the VAT rate on domestic energy bills.

In 2014/2015 VAT contributed 22% of the UK’s tax revenue so it is unlikely that there will be major changes to it, although the UK government would be free, if it wished, to abolish VAT and introduce a goods and services tax instead.

VAT Recovery in other Member States under 8th Directive

As a member of the EU, UK businesses benefit from an online VAT recovery system to obtain VAT refunds from other member states in which they are not VAT registered – called 8th Directive Reclaims. Non EU businesses do not have the benefit of the online system. As a non EU member UK business will only be able to file paper claims, which are more time consuming, slower and more susceptible to challenge from the member state to whom the claim is made.

Use and Enjoyment Provisions

At present there are attractive use and enjoyment provisions which are available where the customer is in another member state. Obviously this will cease to be available once the UK leaves. For example on electronically supplied services, such as software licenses a UK company instead of dealing with VAT in the UK under the reverse charge, will instead receive a French or German etc. VAT charge which it will have to try and reclaim directly from France or Germany under the procedure mentioned above.

Distance Selling Thresholds

At present there are distance selling thresholds so that businesses that sell over the internet do not have to register for VAT in every state in which they  have customers. After leaving the EU there will be a zero threshold for UK businesses which will have to either register in multiple member states or stop trading with EU customers.

First published in June 2016