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Written by: David Wilson

David Wilson

Technical Associate Director

Is alignment with EU VAT rules post-Brexit wishful thinking?

We know that, without agreement on VAT, all goods, including those which arrive through the postal system, entering the UK will be subject to import VAT. We also know that, without the adequate infrastructure (including the role played by the UK’s Border Force) there could be serious delays and additional costs to supply chains.

What may not be so commonly known is the role that VAT plays in a functioning EU single market. That single market allows goods and services to be traded freely across borders within the EU. To make this easier for businesses – and avoid competitive distortions between them – EU countries have agreed to align their rules for taxing goods and services.

Minimum tax rates are therefore in place for VAT and excise duties, along with rules on how these taxes should be applied. Whilst governments are free to apply their own national rates above the EU minimums if they wish, the common VAT area does afford businesses the free flow of goods between member states and ensures that governments know that VAT has been correctly applied, thereby protecting revenues and combating tax avoidance.

Reports that Mel Stride, financial secretary to the Treasury, has sent a letter to a fellow MP stating that ‘the government aims to keep VAT processes after EU exit as close as possible to what they are now’ indicates that the implications of VAT are now on the Brexit agenda.

Indeed, in a previous WTB article, we highlighted that the Treasury must be considering seeking some form of continued participation in the EU’s VAT system given that ‘mapping exercises’ are being undertaken on how EU proposals would impact on parts of the UK VAT legislation.

However, the UK’s alignment with EU VAT rules seems fraught with practical difficulties.

Keeping ‘UK VAT processes as close as possible to what they are now’ does not futureproof the UK against significant changes to the EU VAT rules within the next few years. Technical amendments proposed to implement the EU’s principles or 'cornerstones' of the definitive VAT system will result in some 200 of the 408 articles in the VAT Directive being changed. Among these is the ‘destination principle’ whereby VAT on goods is taxable and accounted for in the member state of consumption, and a universal VAT threshold capped at €85,000 (approximately £75,000 which is significantly below the current UK threshold of £85,000). These proposed measures require the unanimous agreement of the member states, and member states only; as a ‘third country’ the UK will not be able to vote, or veto, these proposals. Alignment with future EU VAT rules would therefore mean the UK acceding to the wishes of the EU27.

There’s also consideration of the agreements and accords within the ‘Treaty on the Functioning of the European Union’ (TFEU) which provides for the harmonisation of taxes across member states. It may prove somewhat difficult for both the UK and EU to agree that some articles within TFEU would be applicable post-Brexit, but not others.

We must also consider the integral role of the Court of Justice of the European Union as it is the final arbiter in domestic interpretation of EU VAT rules, a ‘red line’ as far as the UK government seems to be concerned.

Finally, the Taxation (Cross-border Trade) Bill, currently before Parliament, provides for amendments to UK VAT provisions following Brexit, a primary content of which is the systematic elimination of all references to the EU and ‘member states’ from UK VAT legislation. In principle, this suggests that, although the UK government has been aware of the proposed EU changes for some considerable time, it does not envisage such being applicable in the UK. The impact of Mr Stride’s comments can only indicate that this proposed legislation would be shelved, or significantly altered before withdrawal, potentially impacting the EU (Withdrawal) Bill in the process.

It is welcome that the VAT implications of Brexit are now coming into focus and, without getting into the minutiae of detail, it can however be seen that, even at a very high level, the ramifications will have an impact on future negotiations. 

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