What does Brexit mean for VAT?

Every member of the European Union (‘EU’) has VAT. It is a condition of membership.

After leaving the EU the UK is not bound to have VAT. It could abolish it. If this were to happen the UK would be going against a worldwide trend as VAT has spread to countries outside the EU. This is because VAT raises a lot of money.

In the UK, VAT raises about 17% (£120bn) of government revenue. As it is collects so much tax for the Exchequer it is difficult to believe any government will get rid of it. It seems more likely that VAT will continue in the UK even after we leave the EU.

Like all EU members the UK must have VAT rules which are consistent with the over-arching EU laws. The EU laws set parameters within in which the UK is free to change the rates of VAT and to alter to some extent how it applies. The parameters were agreed by the EU VAT committee in which the UK played a very active role.

After leaving, the UK should be able to amend in any way it likes the VAT laws applying here. For example after leaving the EU the UK will unilaterally be able to apply a different rate of VAT to existing goods or services. However life may not be so simple.

Trading with businesses in other EU countries has never been simpler. This is due to the single market. What happens about this will be major part of the leaving settlement agreed with the EU.

Some third party countries have access to the single market (eg Norway and Switzerland) however this comes with conditions. Some examples which we have read and heard about include monetary fees, free movement of people etc. Further, the EU normally insists that the third party country has VAT conditions. Without this there will not an agreement and the third party country will not get access to the single market.

The time allocated for reaching an exit settlement with the EU is two years. The two years start from when the UK formally applies to leave. Whilst the UK is negotiating an exit agreement VAT is unlikely to change significantly. There are some good reasons for thinking this.

The exit negotiations will be very involved and most probably fraught whilst both sides struggle to get the best deal. Making changes during this period to UK VAT laws which infringe EU legislation would likely antagonise the other countries making some very difficult negotiations even more difficult.

In summary, we do not expect there to be any material changes to VAT while the UK continues to be part of the EU.

Tagged with: ,