On 23 June the UK voted to leave the EU. Currently the decision to invoke Article 50 and give official notice to exit the EU has not happened. As ‘Brexit’ seems to be raising more questions than answers, many UK businesses are wondering what happens next.
UK VAT law derives from European law and was introduced as part of our original accession to the Common Market in 1973. It is also one of the largest revenue generating taxes for the UK government. As such, it is unlikely to be abolished or significantly changed as a result of Brexit.
However, the way UK VAT currently operates is closely connected to our EU membership, so once the UK has left the EU we may see some changes come into place. For businesses operating mainly within the UK the effects are likely to be less than for more internationally-focused businesses.
Once we leave the EU, the government will have more flexibility over setting VAT rates and liabilities. The current single claim mechanism will cease to apply, making the process for UK businesses to reclaim VAT incurred in EU member states more administratively complex.
We may see the UK maintain a parallel VAT system for the first few years because of the confusion and cost changes would cause.
The UK is currently part of a customs union with other EU member states, which means that goods can flow freely without customs duties or import VAT.
Brexit negotiations are likely to try and preserve these arrangements, but it is likely that the transactional costs of trading with the EU will increase. Additional costs in the form of customs duties may also be considered.
Outside of the EU, the UK will be able to negotiate free trade agreements with other countries, although these agreements can take many years to implement.
UK employers of EU workers
At this stage the arrangements for existing EU workers in the UK is unclear. Speculation in the media has suggested that there are several possible arrangements which may come into place:
- Those employed may remain in the UK without any restrictions
- Entry restrictions may be imposed on EU workers
- EU workers may have to gain a new type of permission to stay
Employers are advised to carry out some contingency planning, such as formalising current EU workers’ employment with paperwork showing that they were employed prior to the Brexit vote.
The Chancellor has discounted the possibility of an early Budget in response to Brexit. We can expect the Autumn Statement to set out a roadmap of how the UK’s tax and spending plans will evolve going forward.
Outside the EU, the UK government will have even more flexibility over the administration of taxes and much will depend on the negotiations which take place once Article 50 is invoked.
Until formal negotiations start it will not become clear what ‘Brexit’ really means for business in Britain. These detailed negotiations will determine the exact arrangements going forward.
It is important not to act in haste while so much remains unclear. At this stage there is not enough information to make decisions, however over the coming months we should start to see some clarity over how the UK’s relationship with the EU will evolve.
Businesses should focus on staying informed at this stage and be prepared to undertake some contingency planning on key issues as the political and economic landscape becomes clearer.