Written by: David Wilson

David Wilson

Technical Associate Director

Government committee: “will UK be ‘in’ or ‘out’ of EU VAT system after Brexit?”

An influential House of Commons committee considers that the Government is operating, even if only provisionally, under the assumption that the UK might still be in the EU VAT area in 2022.

A report by the European Scrutiny Committee, chaired by Conservative MP Sir William Cash, expresses concerns about ‘the inability, or unwillingness’, of the Government to share detailed propositions for the mitigation of VAT-related barriers to trade flow between the UK and the EU as and when the UK leaves the single EU VAT area. 

As the Government continually refuses to confirm whether the UK intends to stay in, remain aligned with, or fully exit the single EU VAT area post-Brexit, the Committee concludes that the Treasury is considering seeking some form of continued participation in the EU’s VAT system to minimise any new frictions in trade with the remaining member states.

Noting the European Commission’s (EC) proposals to implement the ‘definitive’ VAT regime by 2022, the Committee identifies that, if the UK is to be bound by EU VAT rules (which it might be to maintain the ‘freest and most frictionless trade possible’), it is not clear how the UK could influence keys measures in the EC’s proposal. For example, how could the UK unilaterally reject the eventual abolition of the VAT reverse charge mechanism; snub the use of the One-Stop Shop for cross-border sales; or refuse to apply an EU-wide VAT registration threshold, without any representation or ability to veto the EU tax-related proposals’, if they are agreed and implemented by the EU-27?

Observing that the EC’s proposals on the new VAT rates system will not take effect until at least 2022, the European Scrutiny Committee asks why, if the post-Brexit ‘transitional’ period is to 31 December 2020, the Treasury is currently undertaking a mapping exercise to identify how the proposal could impact on the UK’s current VAT reduced-rates or zero-rates. Similarly, the Committee asks why the Government is making assumptions that the EC’s proposals on small business exemptions may apply in the UK from 2022 onwards, when the UK will no longer be part of the EU. 

Whilst VAT-related trade barriers will arise if we leave the EU VAT regime, the proposed changes would undoubtedly pose some administrative challenges to UK businesses if we remain subject to EU VAT law. However, in the absence of clear and detailed proposals from the Government, it remains unclear to what extent the UK would require full compliance with EU VAT legislation, which ultimately falls within the jurisdiction of the European Court of Justice.

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