Darren Mellor-Clark, an indirect tax expert at Pinsent Masons, says the Brexit vote puts, “a question mark over the UK’s VAT system.”  Is he right?

The threat of a non-EU compliant VAT system

Mellor-Clark suggests that leaving Europe means Britain won’t be obliged to maintain a compliant VAT system. This is bad news on a very basic level, simply because the last thing we need is another system, more change, more uncertainty and more disruption.

However, don’t panic. It’ll take some time and a lot of consultation before any changes are made.  The question will be more about the current ‘reverse charge’ mechanism for goods and services when buying or selling to businesses outside the UK. We’ll keep you up to date. 

Admin nightmares on the cards?

The current VAT system abides by UK legislation but is based on an EU Directive insisting we impose VAT at a minimum rate of 15%. We have two years in hand before our actual departure from the EU. But businesses are already expressing concern about Brexit’s effect on the nation’s future VAT system.

Britain generates an awesome £115 billion a year from VAT, so it’s highly unlikely to go away altogether. But will the new system be based on EU law? Most businesses hope so, since a Brexit doesn’t mean we’re all going to stop trading with mainland Europe. Quite the opposite. Many business leaders also acknowledge that any system that didn’t work along the lines of the current EU-friendly one would prove an admin nightmare.

A cut in the VAT rate? Not likely

It’s doubtful the government will cut the VAT rate below 15%. The treasury would throw a fit. But Brexit leaves the nation free to impose different rates of VAT on different types of services – another potential nightmare – as well as giving those in power the chance to extend or curtail the list of goods and services currently enjoying zero rating or VAT exemption.

Our current EU-based VAT system

Whatever happens, the changes are predicted to be slow and steady. It’s doubtful mortgages, insurance and savings will become taxable. But some believe Britain might win its long battle to provide better VAT  exemption for insurance intermediary stuff. On the downside, as if we needed another downside, pensions and investment funds might become VATable here, something the EU doesn’t agree with.

Things that might change

EU membership delivers a ‘customs union’ whereby goods can be moved around inside the EU without attracting customs duty and import VAT. Will this change? Potentially, but nobody yet knows exactly how. Brexit also gives the Treasury a chance to introduce law to get rid of  historic direct tax refund claims, which have turned out expensive for the UK government.

The same goes for state aid rules, which stop selective tax advantages for some taxpayers. And while we’ll have to comply with World Trade Organisation rules on state aid, our government might enjoy extra  flexibility around giving businesses state funding.

Our current EU-based VAT system means financial services and insurance transactions with non EU businesses let the government recover VAT on costs. Now we’ll have to pin down how to deal with VAT recovery for EU transactions. It’s all up in the air, which doesn’t help business.

We’ll help you stay on board and get prepared

That’s just the tip of the iceberg. At this time all the changes that could happen haven’t been quantified, and the sheer breadth of the necessary changes is likely to deliver a few nasty shocks to the business landscape. In the meantime, get in touch with us and we’ll help you make sure your tax and VAT matters tick all the right boxes, as well as preparing you for the brave new world.