No immediate changes to the UK’s VAT system are likely until
formal arrangements are in place for the UK to leave the EU.
This process is likely to take some time and it is expected that HMRC will make announcements on the timing of any future changes well in advance. HMRC is also expected to issue detailed guidance on any changes to VAT and Customs procedures in order to allow businesses to be prepared for operating outside the EU.
However, some of the likely changes that will impact VAT are summarised as follows:
1. UK domestic VAT rules
- a) The EU only requires Member States to adopt a standard rate of VAT that is not less than 15%. There is currently no upper limit. Therefore, the UK government will continue to be able to set the standard rate of VAT.
- b) The scope of the reduced rate and zero rate of VAT is tightly controlled by the EU. Therefore, once the UK formally leaves the EU, the government will have greater flexibility to extend (or limit) the scope of these reliefs for social and fiscal purposes.
- c) Exemptions from VAT are also legislated for at EU level and leaving the EU will enable the UK government to consider extending the exemptions or potentially taxing supplies currently treated as exempt should it wish.
This increased flexibility will allow the UK to extend the scope of VAT reliefs to the charitable sector. It could also open up the possibility of removing the 5% rate of VAT from domestic supplies of gas and electricity. However, while there is every chance that the UK government will take this opportunity to implement some minor changes to the rates and scope of UK VAT, wholesale changes are considered to be unlikely.
2. VAT transactions with other EU countries
This is the area of VAT that could see the most significant changes to the way VAT is administered.
- a) Intra-EU transactions in goods will no longer be treated as despatches and arrivals but as exports and imports. This could mean sales of goods to customers in other EU countries being treated as zero rated exports (to both businesses and private consumers). There will be no requirement to comply with intra-EU invoicing requirements (for the reverse charge procedure) and no obligation to register for VAT in other EU countries under the existing distance selling regime. EC Sales Lists and Intrastats will no longer be required but additional paperwork at the point of import and export (as currently required for non-EU trade) is more likely.
- b) Most services to EU businesses will continue to be outside the scope of VAT. This will extend to certain services supplied to private consumers as it does now for those belonging outside the EU.
- c) It will still be necessary for UK suppliers of digital services to register for VAT in the EU country of the customer or to adopt the non-union Mini One-Stop-Shop ("MOSS") scheme (see below for more details on this point).
- d) The UK will no longer be required to apply the Tour Operators Margin Scheme ("TOMS"). The UK could decide to exempt all non-UK travel services, apply VAT to all travel services supplied by UK based tour operators, or come up with a UK version of the TOMS.
- e) Refund of VAT incurred in other EU countries will require UK businesses to submit 13th Directive claims, the procedure currently used by non-EU members, rather than claim under the online intra-EU process.
3. Import and exports (customs duty)
Subject to any trade agreements with the EU, we could see Customs Duty being payable on goods moved to and from EU countries. The details of any trade deal are likely to be subject to much political debate in the coming months. However, in principle, when the UK leaves the EU, Customs Duty that is currently revenue belonging to the EU will revert to the UK Exchequer. The UK could adopt some changes especially where it has had past disagreements with the EU on specific Customs Duty charges. However, most procedures and reliefs currently operated for non-EU trade (i.e. temporary importation, inward processing relief/suspensions, etc.) are likely to remain in place and could simply be extended to cover imports from EU countries.