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What a Brexit could mean for VAT

Andy Dawbarn

27 June 2016

As Britain is left waiting to see what the future holds as an independent nation, many businesses will be asking questions about what to expect following the Brexit result and key timings as to when those changes will be taking place. VAT is one area where the UK could see more significant changes after leaving the EU and out of all the taxes is likely to be the most affected.

What’s changed?

Now the UK has voted to leave the EU, businesses could face a reform in the way VAT is charged and paid on domestic supplies of goods and services.

Any changes to VAT law would no longer be bound by decisions of the European Court of Justice. Without the constraints of the VAT Directive, the UK Government may have greater freedom to apply its own interpretations of the rules which could lead to changes in how HMRC applies VAT.

Furthermore, Brexit will result in an exit from the EU’s Customs Union.  However, until we officially leave the EU, the current rules on the supply of goods between EU countries will remain.  Indeed, HMRC has set up a recorded message on their helpline which confirms this.  A sensible move. The UK has up to two years to exit the EU from a legal perspective and until this time, current VAT and duty legislation based upon the EU framework will still apply. Indeed, at this stage, nothing will change immediately.

The next chapter

In my view, it seems most likely that we will end up with a model similar to Norway which, whilst able to set its own agenda in terms of its VAT regime, does enjoy some benefits in terms of the ‘single market’ and freedom in terms of movement of goods.

In this regard, when the UK leaves the EU, it would no longer be a member of the European Economic Area (EEA).  The UK would have to seek to re-join the European Free Trade Association (EFTA) and then apply to join the EEA.

It is possible that this could be tackled in the course of withdrawal negotiations with a view to the UK acceding to EFTA and the EEA as soon as it had left the EU, but the move would not be automatic.  There is no precedent for a non-EU/non-EFTA state joining the EEA.

Radical reform

Brexit actually represents a fantastic opportunity for the UK Government to radically simplify many aspects of the tax.  It could also be used to reform contentious areas such as reliefs to charitable bodies and so on, all of which are currently constrained by the EU legislative framework.

However, the reality is much more likely to be that any new regime will add further complications for businesses – with additional administration and more ‘red tape’ – than that which they currently enjoy.

All remains to be seen, of course.  In the meantime, it is clear that all we can really do is to wait and see.

For further information, please contact your local Wilkins Kennedy office or contact us to speak to a member of the WK VAT team.

About Andy Dawbarn

Andy Dawbarn

Andy joined Wilkins Kennedy in 2010, having spent over thirty years in VAT. He is a Partner of the firm, and leads the direction and delivery of VAT and other indirect tax advisory services at WK. Andy is CTA qualified and manages a varied portfolio, working with UK-based and international businesses alike. Andy’s role includes providing advice on indirect tax services, new legislation and operational compliance. His sector expertise spans financial services, property and construction, academies and not for profit.

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