Opinion: how VAT can be re-shaped after Brexit

As part of our AATPowerUp series on tax, we ask two experts for their views of the options for VAT after Brexit.

VAT is often controversial and complex. It’s not going to disappear after we leave the EU but there will be an opportunity for change.

Vaughn Chown, head of VAT at Gabelle

Post-Brexit, I think we may see a flat VAT rate of around 8% levied on all goods and services, reducing the level of VAT fraud. It means that newly incurred VAT is balanced out by savings made elsewhere. It’s pretty much a no-brainer.

Standardisation across the board

Michael Gove suggested abolishing VAT. I’m not sure anyone would go that far. However – imagine if there was only one rate of VAT.

A single rate would mean no exemptions or differentiation for financial services, transport, books, healthcare, etc. There would be just one rate of VAT on everything, payable by the final consumer and collected by suppliers.

You might think there would be an uproar when VAT is introduced on previously exempt items (the row about the ‘tampon tax’ was not that long ago). Yet has anyone found that the price of children’s shoes is ever 20% less than those of adults? 

Moreover, if VAT was reduced on alcohol, sweets, ice cream, chocolate biscuits, fizzy drinks, fast cars and motorbikes, would the price remain the same, with no consumer benefit?

Lowering the VAT rate

Reducing the standard rate of VAT reduces the profitability of VAT fraud (see point 3.4 here). One study showed that a 1% increase in VAT reduces VAT compliance by 2.7%.

We may need to retain a lower or nil VAT rate on basic foodstuffs, but where do you draw the line between a cake and a biscuit or a supply of catering hot food? The complexities start again.

If a VAT rate of around 8% levied on all goods and services reduces the level of VAT fraud and means that, where VAT is newly incurred, it is balanced out by savings made elsewhere, then why not?

Problems occur in the current VAT system when charging and recovering VAT between businesses, as is inherent in the system. Slowly, we are waking up to use of the reverse charge.

Potential savings

Simplification offers savings for the Government – no need to waste taxpayers’ money on cases concerning whether financial services are exempt, or whether you can claim the VAT back or not. HMRC would need fewer civil servants to police VAT, and what a relief it would be for business owners to no longer pick up the phone and hear: “I’ve got the VAT man on the phone for you”. 

Glyn Woodhouse, VAT partner at BDO LLP

Since the EU referendum, the focus of business has been on the immediate impact of a potential no-deal Brexit. This does, however, leave the wider question: how will VAT change, and can it be shaped to provide a more equitable and competitive environment after the UK’s exit?

The UK is free to decide for itself

The UK VAT system derives directly from European law. This means that, even though the EU VAT Directive is transcribed into UK law, the government and the courts are obliged to consider matters in accordance with EU jurisprudence. In cases of disagreement, it is EU law that takes precedence.

Once the UK is no longer part of the EU, it will be able to decide for itself how transactions in the UK should be taxed.

This will give the government an opportunity to address a variety of issues that it has never quite agreed with. The hated ‘tampon tax’ is one example, and it is likely that sanitary protection will finally be made zero-rated.

Another obvious example would be the VAT exemption for financial intermediaries. The UK has been at odds with the EU for more than 15 years, following the Arthur Andersen EU court decision. It is hoped that business may finally be able to take a view on this without the threat of that judgement being brought into play.

Creating confidence

While many will look to the government to reduce the burden of tax, a more realistic hope may be that, by making VAT law more responsive to UK businesses, policymakers and the public, greater clarity will emerge. It is hoped that business confidence in how the government will tax its transactions will be the real prize.  

Read more on VAT as part of our #AATPowerUp Tax 2020 campaign for September and October:

• Power up your tax knowledge with AAT
• Will the UK become a tax haven after Brexit?
• VAT is too valuable to disappear after Brexit
  
• How Brexit will affect accountants

David Nunn is a former Content Manager at AAT.