With Brexit potentially not far away, the time is ripe for speculation and theorising around how Value Added Tax (VAT) will function when the UK leaves the EU. Remember that current UK VAT laws are derived from their European equivalents, and that HMRC must set its VAT legislation to abide by European Directives and the rulings of the European Courts of Justice.
Leaving the EU and taking back full control of how VAT legislation can look will allow many possibilities including, but not limited to: lowering the standard rate of VAT below 15%, setting different VAT rates for different service sectors, and introducing additional zero rates of VAT on specific goods, services or industries.
The UK Government recently commented that in the event of a no-deal scenario, the UK VAT system would continue to largely mirror the existing legislation with only minimal changes. However, times of uncertainty, including the possibility of a new Prime Minister or even a new governing party, mean that no definitive statements can be made.
What is known is that when, or if, the UK leaves the EU, the rules encompassing cross-border supplies will become simpler (on paper at least), with all cross-border supplies involving EU countries switching to the current rules for cross-border supplies involving non-EU countries. Effectively, from a UK perspective, the three-tier (internal, EU and Rest of World) system will be replaced by a two-tier (internal and Rest of World) system.
This simplification, on paper, will likely come with additional complexities, as the EU are then likely to view the UK in the same way they do other non-EU member countries, potentially resulting in movements across borders becoming more time consuming, tedious and costly as a result.
Some commentators have suggested that VAT may become a thing of the past post-Brexit. This is, however, unlikely given that VAT revenues account for approximately a fifth of HMRC’s total tax take. It is therefore hard to imagine a Government in need of generating additional funds turning its back on this particular element of its tax revenue.
Comparing VAT application pre- and post-Brexit
The remainder of this article mainly focuses on the provision of services direct to consumers cross-border, and compares how these are treated for VAT purposes now against how they could be treated by the post-Brexit environment.
The examples consider only the UK VAT exposure and do not cover the possible EU exposure. However, it should be noted that while in the past, UK businesses operating in the removals industry were perhaps given a free pass when it came to registering for the local EU VAT equivalent, this may no longer be the case following the UK leaving the EU.
Current rules surrounding removal services supplied to consumers stipulate that the place of supply for VAT purposes is the location where the pickup begins. We therefore have the following (simplified) possibilities:
Note: currently where journeys originate outside of and then enter the EU, or originate inside of and then exit the EU (including the UK), only the proportion of the journey within the EU is subjected to the applicable VAT above. Usually a split of the fee based upon the respective mileage allocations is accepted by HMRC, although other methods may have historically been agreed.
Moving to the post-Brexit environment, and focusing solely on journeys involving (to some extent) the UK, could result in the following possibilities:
For completeness, the provision of services direct to businesses cross-border are currently deemed to have a place of supply where the business customer belongs (unless they are not a VAT registered business, in which case the rules for consumers mentioned earlier apply).
Under current legislation, the UK provider will zero-rate the supply and the business customer will reverse charge the local VAT equivalent on their local VAT return. Supplies to businesses outside of the EU are Outside the Scope of UK VAT. It is anticipated by some commentators that post-Brexit, all supplies to businesses, whether they be VAT-registered EU business customers or non-EU business customers, will be Outside the Scope of UK VAT.
This article has been written from a UK VAT perspective with a passing comment on EU VAT obligations. Furthermore, it is speculative in terms of the possible impact of changes to be made after the UK leaves the EU. Therefore, Wellers suggests that before entering into any new or unknown business agreements, the transaction and its VAT implications are discussed with your tax advisor accordingly, and that the extant UK rules and legislation are applied and considered.
Please be aware that the information provided in this article is subject to regular legal and regulatory change. We recommend that you do not take any information held within our article or website as a definitive guide to the law on the relevant matter being discussed. We suggest your course of action should be to seek legal or professional advice where necessary rather, than relying on the content supplied by the author of this article.
For more information, please visit BAR Affiliate Wellers Accountants at www.wellersaccountants.co.uk, or contact 0333 241 6000.