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Glasgow
+44 (0)141 221 2984

Edinburgh
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Stirling
+44 (0)1786 451745

Dumbarton
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Hamilton
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French Duncan

MAY 2016 - Brexit – what might it mean for Indirect Taxes?

The UK will soon conduct its much hyped referendum on whether or not to remain part of the European Union.  The UK public continues to be constantly bombarded with information from a variety of sources on the subject, including political party viewpoints, tax advisor and other experts, economists and journalists and even a fair few celebrity opinions on the good and the bad of remaining in the EU. 

Not wishing to be outdone, this article will consider the possible effects of Brexit for UK VAT and indirect taxes, but it does not aim to make a case either for or against remaining in the EU.  With this in mind, let’s consider some of relevant facts of EU membership for the UK. 

The EU is an economic and political partnership which currently involves 28 European countries. It was put in place after World War 2 to encourage economic co-operation (and discourage any further wars).  Since its inception it has grown to become the "single market" we know today, allowing goods and people to move around freely, as if the member states were one country. It has its own currency, its own parliament and it routinely sets legislation covering a wide range of issues, including tax.

The UK tax system has been directly influenced by EU Legislation for the past 40 years or more.  Therefore, any exit from the EU is likely to have a major impact on the UK’s domestic tax regime, including VAT and Customs Duties.

On one hand, if the UK Leaves the EU it will no longer be required to implement the EU VAT Directive, potentially meaning UK businesses will no longer be required to charge and pay VAT on goods and services provided in the UK.  However, it is unlikely that the UK Government would wish to lose the sizable annual tax revenue that VAT currently generates and on this basis we should expect to see the UK Government implement its own version of VAT, which might well operate along the same lines as domestic VAT does now. 

On the plus side, an independent UK could be more flexible when setting VAT rates, with the Government being afforded greater scope to set new rates, including widening the scope of the zero rate and exemptions as well as determining which goods and services they should be applied to.  This might see higher rates of domestic VAT being applied to ‘unhealthy’ foods and seemingly luxury items including, fizzy drinks, chocolate, cigarettes, alcohol etc. at the same time as the zero rate or exemptions perhaps being extended to a wider range of goods and services, currently charged at the standard or reduced rate of VAT.  However, UK businesses would no longer be able to rely on EU law to defend against HMRC decisions in respect of the treatment of specific supplies, which may afford HMRC a stronger position in future VAT disputes.

However, if we leave the EU sales of goods to and from other EU countries may no longer be able to be supplied under the EU acquisition and dispatch regime, where the requirement to account for VAT on goods sent and received is done via businesses ‘ VAT returns; streamlining and simplifying the movement of goods.  On the plus side, this would remove the need to file Intrastat returns and EC sales lists but, instead, supplies of goods between EU countries may need to be treated as imports and exports, subject to import VAT and customs duty charges on entry to the UK and EU countries, with the need to clear customs before the goods can be released.

Additional steps such as these may result in UK importers and exporters being faced with cash flow and time constraints as UK business that regularly buy from EU suppliers may be required to put deferment accounts in place or consider using customs warehouses to help ease the cash flow strain that higher import charges might place on their businesses.

Similarly, the UK would no longer be part of the EU’s Customs Union, which would mean EU import duties would apply to goods sourced from the UK, potentially making it less attractive for EU businesses, as well as private consumers, to source goods from the UK. 

Goods bought from the UK would need to be exported from the UK and then imported to the EU customer’s country, resulting in extra time and administration charges becoming a routine part of the supply chain.  The UK would also find itself excluded from the many free trade agreements that the EU has negotiated with other countries throughout the world.

Ultimately the UK could set its own customs policy and levels of duty, potentially increasing duty levels from those currently permitted under the Union Customs Code which could potentially increase revenue from imports or have the opposite effect and discourage overseas trade.

Finally, the recently introduced Mini One Stop Shop (MOSS), which facilitates the collection of VAT from overseas EU traders supplying electronically supplied services, would no longer be available to the UK in its current format, making it more difficult for the UK to enforce and collect VAT liabilities from EU suppliers.  As the EU VAT action plan currently proposes an extension to the existing MOSS regime to cover all cross border supplies, not just electronically supplied, the potential loss of revenue or added administrative burden to mitigate any such loss, may be potentially even greater.

As the foregoing will demonstrate, there are many possible implications for the UK should it leave the EU, some positive and some potentially less so. However, without the benefit of a crystal ball at our disposal, all we can do for now is await the outcome of the referendum vote on June 23rd  to find out what changes, if any, may be on the horizon.