VAT Implications of Brexit
Investing in the UK was traditionally both an investment in a large modern economy as well as a smooth gateway into the EU, one of the world’s foremost trading blocks. For those outside the EU the bemusement at the British people's decision to leave will now be tempered with a cold hard look at what the UK can still offer. Inward investors will have to consider whether the UK is the best bet or whether a split approach is required.
Within the government, there are contrary opinions of the future of the UK’s economy with or without a free trade deal.
Much has been said about World Trade Organisation rules and free trade. This is an important issue as customs duty tariffs will increase trade costs and need to be factored into future business models. However, the VAT changes that will occur as of the first day of Brexit are not so frequently debated and are probably less well understood, maybe even within certain parts of the government.
Many businesses though are waking up to the disruptive effect of these changes as they realise just how tied into the EU VAT regime the UK is. UK VAT rules are based on the EU model set out in the VAT Directive which applies a standard set of VAT rules across the current 28 countries. More importantly, these rules regulate and ease trade between the member states and it is some of these rules that will change immediately and significantly upon Brexit, resulting in immediate issues for businesses.
The services sector will be impacted, in some specific cases significantly, but the greater impact will arguably be felt by those trading in goods. The EU VAT rules currently make trading with other EU countries simpler, VAT is less of a cash-flow item and there are specific easements and simplifications to address complex trading patterns (triangulation, temporary movement of goods etc.) and to keep goods and deals moving. Granted, there are some nuisance reporting requirements (EC Sales Lists, Intrastats) that will disappear, but it is likely some similar form of trade reporting will be needed by the post-Brexit Treasury and Trade and Industry departments, as well as EU countries on the other side.
From large businesses with EU-wide supply chains to smaller players operating online the effects will be felt widely. The new rules will need review on both sides of the new UK-EU border. The financial industry already faces a strong incentive to relocate at least some functions to the EU. Will there be a similar VAT incentive for other businesses? Can this be avoided? What contingency plans will permit businesses to best ride out the looming VAT and customs duty issues? Will such plans themselves have other tax and business consequences?
There is much to consider over the next two years and as yet there is no certainty, except one; the time will pass all too quickly.
If you would like to discuss any VAT or indirect tax matters further, please get in touch with me or your usual Mercer & Hole contact.
Date: 2nd May, 2017
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