The UK’s departure from the EU will have significant VAT and Customs implications for many businesses. Although the UK is likely to remain in the EU for at least the next two years, businesses will need to plan ahead as the details of our new relationship with the EU become clear.
VAT, Brexit and the European Union
One of the conditions of EU Membership is to operate a common VAT system, based on EU VAT law. Leaving the EU will mean that the UK will, in principle, be free to change its VAT rules or even scrap VAT altogether. Given that VAT is the UK’s second biggest source of tax revenue, VAT is undoubtedly here to stay in some shape or form and, in all likelihood, most of the UK’s VAT rules will remain unchanged. So for many, the VAT impact of leaving the EU may be small.
VAT after Brexit: the road ahead
After exiting the EU, the government will be free to introduce new VAT rates for certain goods or services, which is not currently permitted under EU law. The government is likely to take the opportunity to reform specific areas of VAT law which are currently problematic. For example, the VAT rules for the financial services and insurance sectors are in desperate need of an overhaul, which is something the EU has been trying to do for many years, without success. Given the importance of these sectors to the UK economy, making the VAT rules clearer and more business friendly could present a good opportunity for the UK.
So how might UK VAT change?
Some aspects of the UK’s VAT rules will have to change, particularly rules concerning trade in goods and services with the EU. One of the key features of the single market is that there is free movement of goods within the EU, which means there are no Customs controls when goods move across EU borders. The position post Brexit will depend on what, if any, trade terms are agreed during the negotiation process. However, businesses trading in goods with the EU will certainly see some significant changes. There are, however, many things that the government could do to soften the impact, such as ensuring that our Customs processes and procedures are easily accessible and highly efficient.
Whilst the UK negotiates its exit from the EU over the next two years or more, the VAT rules should remain unchanged, so from a VAT perspective, it will be business as usual. The Menzies VAT team will keep you updated as the Brexit story unfolds, to help you plan ahead.