By Michael Steed Brexit How Brexit affects indirect taxes 14 Nov 2016 The indirect taxes and duties mainly affected by Brexit are: VAT, customs duty and excise duty. VAT and excise duty are based on EU directives. EU directives are stamped into the legal canons of member states by the member states themselves. Customs duty is different. It is not based on EU directives, but rather EU regulations, which, unlike directives, are directly enforceable in all of the member states and do not need local implementation. We are all familiar with the basic excise products. Put crudely, they are: oils (for example,petrol and diesel), booze and cigarettes. The directives around excise duties give us, among other things, tax warehouses (duty-free sanctuaries), booze cruises and red-diesel rules. It’s less well understood that energy taxation has a European base. EU excise-duty rules cover all energy products used for heating and transport, as well as electricity. The primary goals of EU energy-tax legislation are to ensure that the single market runs smoothly, and to prevent distortions in competition and trade within the EU. The HGV levy on overseas lorries also has an EU base. So what does all of this mean? At the moment, we can only surmise what kind of new world we will end up in post-Brexit. But it’s clear that there is the potential for VAT and customs and excise duties to change. I don’t expect there will be wholesale change to indirect taxation in the UK. The current models, on the whole, work fairly well. VAT, for example, brings in around £120bn per year in the UK, so that won’t be scrapped, although the UK government may change the details a bit (think Jaffa Cakes and the tampon tax) – but without now having to refer the changes to the EU Commission. The trading rules for goods with the EU will also need to be adjusted. At the moment, we are all within the customs territory, so there are no customs tariffs between the UK and the rest of the EU. The Norwegian and the Swiss models effectively offer an extension to this (albeit in different ways), but there will be a cost attached to emulating either. The Canadian model offers a clean sheet, but trading deals take a long time to forge. Whatever the outcome, the legal basis for customs duty will need to change, as we don’t have UK laws, but rather EU regulations. So we will need to address that issue too. The VAT rules on EU trading will also need to change if we adopt the Canadian model; we will effectively be a ‘third country’ (EU-speak for a country outside of the EU) and will face tariffs against our goods coming into the EU. The influence of the Court of Justice of the EU will diminish too. At the moment, its decisions are effectively binding in UK courts, but they will presumably become persuasive only. We will also be free from infringement proceedings – that is, court actions by the EU Commission if we don’t correctly adopt EU legislation. We’ve a long way to go on this, but one thing we can be certain of – it’s going to be an interesting ride. Assuming that the UK leaves the single market (a full divorce from the EU), possible outcomes include: rejoining, like Norway, the European Free Trade Association (EFTA) and the EEA Agreement; rejoining, like Switzerland, the EFTA, but not the EEA Agreement; and not joining either and forming a new series of trading agreements (the Canadian model). Michael Steed is co-chairman of the ATT's tax Technical Steering Group and columnist for Accounting Technician magazine.