UK avoids EU VAT issues till post Brexit

On July 12, the UK issued a White Paper outlining its proposed economic partnership with the EU after Brexit, scheduled for 29 March 2019. Whilst the discussion paper does represent a significant advance on the UK’s aspirations on future trade rules, it is vague on tax and VAT issues – effectively postponing any discussions until the 2-year Brexit transition period up to 31 December 2020.

This leaves over 130,000 UK businesses which trade with the EU in the dark on future requirements, risks and costs on their VAT liabilities. This will likely lead to more delays on investment and growth.

The policy paper covers future trading relations with the rest of the EU, outlining five key points:

1. A 'common rulebook' for the trade of goods between the EU and UK which would avoid the need for timely product checks at borders, including a 'frictionless' Northern Ireland border;
2. A proposed new customs arrangement (“facilitated customs arrangement” ) with the EU to protect UK manufacturing and help avoid a ‘hard border’ with the Norther Ireland
3. How the UK will work within EU law and the role of the European Court of Justice;
4. The future immigration policy;
5. A commitment to remain in the EU agencies that regulate and authorise key industries, including  aviation, chemicals and medicines

On tax, the paper says: “The UK’s proposal for its future economic partnership with the EU would not fetter its sovereign discretion on tax, including to set direct or indirect tax rates, and to set its own minimum tax rates”

It is doubtful that the EU would accept such a free hand to give UK-based companies unfair trading advantages through state-aided tax subsidies. The EU will be concerned that a post-Brexit UK could use tax measures to attract investment away from from the EU, and the EU could block access to the its Single Market in retaliation. Whilst all EU countries have full control over their direct tax affairs today, they are prevented under the Single Market rules from providing unfair tax breaks that distort the operations of the trading block.

There is limited mention in the paper of what the UK is hoping for on post Brexit VAT arrangements. The White Paper does talk about common processes for VAT and excise levies to avoid extra paper work:

However, this does not mean the UK staying within the EU VAT regime. At present, HMRC estimates 132,000 UK businesses trading goods with the EU do not have to pay import VAT on goods coming from the EU - nil rated intra-community supplies. A much larger number of EU businesses do not have to pay import VAT on goods bought from the UK. Under current arrangements, this will change after the end of the 31 December 2020 Brexit transition period. All importing businesses will have to pay and recover VAT for the first time – 20% of the cost of the goods coming into the EU.

Other simplifications that would be lost include:

• Distance selling thresholds for small e-commerce retailers, who would be forced to insure £'000's in EU VAT compliance costs and registrations for the first time
• More complex, paper-based VAT recovery claims on hotel/taxi/exhibition costs whist in Europe
• Special compliance simplifications for supply chains, including triangulation
• Small value consignment stock relief, which allows imports of small goods to the EU without VAT or customs

The UK government has stated in the past that it wishes to stay within the EU VAT regime post Brexit. However, this is not permitted under current EU treaties. Even if these were to be amended for the benefit of the UK, it would make the UK subject to ECJ rulings – a red-line for the UK.

The White Paper therefore reflects the UK’s current path to postpone challenging issues such as VAT until after the 29 March 2019 Brexit. Aside from the uncertainty for trade and investment, this will mean the UK will have lost much of its negotiating leverage when the topic is resolved during the transition period.

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