UK Brexit and EU VAT
The UK is due to hold an EU exit referendum on 23 June 2016. A potential British exit (informally termed ‘Brexit’) would have dramatic effects on the UK’s VAT regime since it is organised in line with the EU’s rules.
Below is a summary of some of the main VAT issues and potential changes that could result from Brexit – which includes a potential bill of €3.6bn per annum for ‘frontier costs’.
There are obviously many other economic, social, foreign policy etc. issues to consider and to weigh in terms of Brexit. This blog post just considers some of the potential changes to the VAT compliance burden for UK-resident companies that could result from Brexit.
Law and VAT disorder
Like all EU member states, the UK’s VAT legislation follows the EU VAT rules. This includes adoption of the directions contained within the principle EU VAT Directive (Council Directive 2006/112/EC). This seeks to harmonise the VAT systems of the 28 member states to help promote the operations of the Single Market regime of the EU.
A Brexit would unchain the UK from the obligation to adopt the EU VAT Directive. Most strikingly, this would affect the rules on reduced VAT rates, and the VAT treatment of UK trade with the rest of the EU. These are discussed below.
Adieu intra-community transactions; Guten Tag import VAT
Probably the most significant VAT change resulting from a Brexit would be for UK exporters who would face the loss of their intra-community trading status. This allows the free, zero-VAT rated B2B sales of goods and services within EU borders. Instead, UK transactions would become ‘imports’ into the EU. This would mean UK exporters post Brexit would have to pay EU import VAT and customs duties. The UK would be able to negotiate some of this away, but perhaps not entirely. And the average bi-national trade deal takes seven years.
It would also force more foreign VAT registrations on UK sellers who had been using the linked ‘triangulation’ relief on more complex transactions. This involves expenses on agents, Powers of Attorneys, sworn translations and fiscal representing on many EU states for non-EU businesses.
It is difficult to place a monetary value on this change since the UK may be able to negotiate some level of free trade with the EU post Brexit. Previous studies have estimated that non-EU states face a 2% charge on their exports into the EU, which would mean a bill of around €3.6bn per year based on the UK’s current sales of B2B goods to the rest of the EU.
Pick-n-mix VAT rates
The only EU restriction the UK faces today on its standard VAT rate is that it should be 15% or higher. Since the UK’s rate is 20%, and more likely to rise than fall, Brexit is unlikely to have an impact in this area. However, the restrictions placed on the member states on which products or services may benefit from reduced VAT rates would be an issue.
Examples of reduced VAT issues for the UK include:
- the UK recently lost an ECJ ruling on its use of its 5% reduced rate on green, energy saving measures around the home. This would be nullified with Brexit;
- the UK would be free to set e-book VAT rates at the same nil VAT rate as it grants printed books (the UK is obliged to charge 20% VAT on e-books under EU rules); and
- the UK could harmonise many confusing VAT rate anomalies forced on it by the EU on food items. For example, cakes are zero-rated, but biscuits are 20%, standard rated.
UK companies incurring EU VAT on hotel, travel and entertaining expenses would no longer be allowed to use the 2010-created national VAT recovery portals. These allow simplified VAT recovery claims via the UK’s HMRC portal in English. Instead, like all non-EU companies, UK businesses would have to resort to old-fashioned 13th Directive recovery applications requiring paper claims to each member state. Aside from the extra admin, this would also result in cash flow delays.
EU holiday jollies
UK tourists visiting EU countries would get a boost. They would be allowed to reclaim any EU VAT they pay on shopping (clothes, souvenirs, electricals etc.) they buy whilst visiting the EU. This would of course encourage more trips to the EU, potentially at the expense of the UK tourism industry. Although returning UK holiday makers would have to pay UK import VAT and duties on their purchases (if declared!)
Fiscal Reps and Bank Guarantee Quagmire
UK companies that are direct VAT registered in the EU for e-commerce sales or holding supply-chain stocks would face an immediate obligation to appoint local fiscal representatives in many EU states. Approximately half the EU countries oblige non-EU companies to have a local accountant or lawyer represent them to the tax authorities, and be liable for their VAT. This in turn creates a requirement to put in place expensive bank guarantees to protect the representatives from financial losses. The UK may overcome this requirement through its continuing membership of the European Economic Area. One of the requirements of the EEA is that countries cannot impose this type of restriction on the free movement of goods.
Distance Selling Threshold gone cold
Following Brexit, small UK-based sellers of goods to EU consumers would lose the benefit of the EU distance selling threshold relief. This relieves them of the obligation to VAT register in each country where they are selling until they hit the VAT registration threshold. This change may well dissuade small e-commerce sellers from promoting EU sales – including geo-blocking on websites – because of the extra foreign VAT compliance burden and costs.
The good news for UK providers of digital services to consumers in the rest of the EU is that they could continue to use the one-stop VAT reporting portal, MOSS. This is available to ‘non-union’ companies as well as EU-based providers for reporting and remitting VAT on local sales.
Use and enjoyment divide and rules
Brexit will mean a change in the advantageous use and enjoyment rules. EU VAT may become due on invoices to UK customers that were previously with UK VAT (or reverse charge). This would leave UK companies for more foreign VAT to try and recover
Accounting software musical chair
Changes in accounting and invoicing software will be required to recognize all of the above. This will include new tax code schemas.