The Brexit negotiations are set to begin soon after the general election. What are the VAT challenges facing UK businesses and their advisers?
VAT is a European Union tax, and the UK will be free to develop its own, entirely separate VAT system once it is outside the EU. A Great Repeal Bill will repeal the European Communities Act 1972 and convert existing EU law into domestic UK law, according to a March 2017 white paper setting out a Conservative government’s approach to legislating for Brexit. Parliament will then decide which elements of that law to amend or repeal.
As we leave the EU “we will no longer be members of the single market or customs union”, the Conservatives’ general election manifesto said, but “we will seek a deep and special partnership including a comprehensive free trade and customs agreement”.
While the Conservatives have pledged not to increase “the level” of VAT, Labour has guaranteed no increases in “the rate” of VAT but has pledged to remove the exemption for private school fees.
How much scope will there be to reduce VAT rates as part of any “competitive” tax strategy? EU law provides that, until the end of 2017 at least, an EU member state’s standard rate of VAT may not be less than 15%. All VAT rates are potentially subject to change, says Vaughn Chown, managing partner at Gabelle, a division of Abbey Tax.
“In addition, supplies which currently have one rate will attract another rate due to the direct effect of Brexit,” Chown says. “Distance selling [of goods from the UK to EU member states] might change from standard rated supplies to zero-rated exports; financial services to overseas customers might become zero-rated supplies, not exempt; and services to EU non-business customers might become zero-rated exports, not standard rated.”
EU case law has clarified what is subject to VAT, the white paper noted, and failing to follow that case law in our own legal system would “create new uncertainties” about the application of VAT. There is uncertainty about the future direction of VAT policy and law, however.
“I suspect that new legislation will develop over time, but that any VAT legislation or CJEU cases which HMRC does not like will be subject to review and possible amendment quite quickly, although Labour has suggested that none of the existing legislation etc. would be altered post-Brexit,” Chown adds. Labour has pledged to prioritise a “strong emphasis on retaining the benefits of the single market and the customs union”, and to protect “all EU-derived laws that are of benefit”.
Imports and exports
Chown, who will address this week’s AAT annual conference, notes that businesses currently receiving goods from other EU member states, as an intra-community supply without VAT or customs duty, are likely to become liable for both import VAT and customs duty post-Brexit: “VAT on imports will be a cash flow issue for businesses that can reclaim the VAT, whereas customs duty will be a cost.”
Changes to the place of supply rules in 2015 mean that a “B2C” supply of digital services to a consumer in the EU is treated as made in the consumer’s country. Digital services include broadcasting and telecommunication services, and electronic services such as downloads of apps and e-books. The Union VAT Mini One-Stop Shop, or VAT MOSS, enables a UK business making such supplies to make returns, and pay the VAT, to HMRC instead of registering in each EU country. (For HMRC’s overview of the scheme, see paragraph 4.8.4 of VAT Notice 700.)
Post-Brexit, the UK business will need to switch to the ‘Non-Union’ VAT MOSS scheme for non-EU businesses, registering in one of the EU-27 member states as a non-union supplier. “This is a further compliance burden,” says Richard Asquith, vice president of global tax compliance at Avalara.
“More worryingly, without an EU VAT registration threshold for these services, several thousands of UK micro B2C e-services providers will have to get UK VAT registered in the UK first to get their EU MOSS registration,” Asquith adds. “The EC has proposed a €10,000 B2C MOSS threshold [below which cross-border sales would be handled domestically]. This was for the benefit of the UK, but post-Brexit the UK’s insistence on this will carry no weight.”
A lower VAT threshold?
The Office of Tax Simplification is considering the implications of the current, “high” registration threshold and has asked: “Would it be less distortive [by removing the “cliff edge”] if the UK’s threshold were lowered to bring in more businesses?” It would appear to be open to a new government to align the Making Tax Digital threshold with a new, reduced VAT threshold.
Chown notes that the UK’s threshold of £85,000 is one of the highest in the EU, and that HMRC “has always resisted a lower threshold”. He does not foresee the UK widening the net to bring in small businesses without the additional resources needed to police them.
Low registration thresholds are always desirable, according to Asquith, to “broaden the tax base and produce more reliable and fair tax revenues”. But they generally only work if the compliance required is light, he says. “Otherwise it imposes high costs of administration for both businesses and the tax authorities who must monitor compliance.”
Digital reporting may hold the key. Asquith believes that automation, involving live or near-live transaction reporting via accounting software direct to HMRC, should result in “the end of complex VAT returns”, and perhaps even “the end of the VAT return” by 2022.
Andrew Goodall is a freelance tax writer and journalist.