On 23 June the UK voted to leave the EU. This decision will have implications for businesses, individuals, the economy and the tax system.
However, the decision to invoke Article 50 and give official notice to exit the EU has not yet happened, and we will remain a member of the EU for at least the next 2 years.
It’s important to remember that the UK economy is essentially strong, and whilst we will see movements in exchange rates and the markets in the short term, they will eventually find their level.
The Chancellor has discounted the possibility of an emergency Budget in response to ‘Brexit’, but we can expect a clearer roadmap of how the UK’s tax and spending plans will evolve going forward to be outlined in the Autumn Statement.
One significant area likely to be affected will be VAT.
Value Added Tax derives from European law and was introduced in the UK as part of our original accession to the Common Market in 1973. However, it is one of the largest revenue generating taxes for the UK government, so it is unlikely to be abolished or significantly changed as a result of Brexit.
The way VAT currently operates is closely connected to our EU membership in many different ways. For UK businesses operating mainly within the UK, the effects of any changes are likely to be less than those for more internationally-focused businesses.
Going forward, the UK government will have more flexibility over the setting of VAT rates and liabilities. The current single claim mechanism will cease to apply and the process for UK businesses to reclaim VAT incurred in EU member states will become more administratively complex.
Cross border reclaims will need to be made to individual member states and will depend on the UK offering reciprocity (i.e. paying UK VAT claims from EU member states).
The changes for VAT on international transactions are likely to be more significant, and will be more dependent on the terms of the UK’s exit.
As a full member state of the EU, the UK is currently within the single market and the customs union, which means borderless movement of goods within the EU. If we negotiate a similar position to Norway and other EEA states, this will give us continued access to the single market. However, Norway is not within the EU customs union. This has significant implications for the VAT treatment of the movement of goods.
If we are outside the EU customs union, all goods moving between the EU and the UK will require customs clearance for VAT purposes, although there may be no customs duties imposed. For good entering the UK from the EU, import VAT will need to be paid or deferred before they can be cleared. This is likely to lead to delays and increased administrative costs, and increases the likelihood of a customs border being needed between Northern Ireland and the Irish Republic.
Businesses with complex supply chains will need to keep these under review and assess the implications as the financial position becomes clearer. Future plans will need to be flexible and take into account potential future changes.
Businesses selling good online to consumers in EU member states will need to review their business models, unless specific arrangements are negotiated. Currently, UK VAT is charged until sales reach a certain level when local VAT registration is needed. When the UK leaves the EU, the default position would be that EU customers would need to pay the import VAT due on their online purchases before the goods could be delivered to them.
Although nothing will change in the short term, and very little may change for UK focussed businesses in the future, there will be major considerations for any business with significant trading relationships with the EU. This will need to be kept under review as the situation develops.
However, it is important not to act in haste while so much remains unclear. Over the coming months we should start to see some clarity over how the UK’s relationship with the EU will evolve and these detailed negotiations will determine the exact arrangements going forward.
If you have any concerns or questions about your VAT position, please contact us to speak to our expert VAT advisors today.