Brexit: What does it mean for customs and VAT?

in Tax, 24.06.2016

So, 52 percent of the British voted to leave the EU yesterday, sending shockwaves around the world. What now?

The first thing the UK would need to do is to trigger Article 50 of the Lisbon Treaty. Afterwards the UK will have up to two years to choose and negotiate its secession arrangements with the EU. Those negotiations will shape the future relationships between the UK and the EU and could have a profound impact on trade, people and migration as well as tax and tariffs. Below, you’ll find a snapshot of what the future may look like from an indirect tax perspective.

Trade and customs

The obvious change will be that trade between the UK and the EU countries will be recognized as imports and exports. Depending on the outcome of the negotiations, customs duty may be payable when goods move between the UK and the EU. This, and most importantly the related import and export formalities, could potentially impede trade between the UK and the EU.

Currently, customs is almost entirely governed by EU Directives, Regulations and decisions from the Court of Justice of the European Union (“CJEU”). Following secession, the UK will regain control of customs and new UK legislation will likely be introduced to replace the EU law.

Duty rates could change under the new UK law. However, a dramatic rate change in the short term is unlikely. Similarly, at least in the short term, customs and international trade programs (e.g. the Authorized Economic Operator program) are likely to continue unchanged as are other customs processes such as temporary importation and duty suspension.

Perhaps a bigger issue for UK businesses is the UK’s trade relationship with other countries. The EU has been negotiating terms of trade with many other countries, noticeably the USA, China and Japan – the three biggest economies in the world. Following secession, the UK would no longer be party to those agreements and would have to negotiate its own trade terms with these countries. Separate trade agreements could take a long time to conclude and this could be detrimental to the UK economy.

VAT

Similarly to customs, the UK VAT law is also governed by the EU VAT Directives, Regulations and CJEU decisions. Following secession, the UK will no longer need to comply with the EU VAT law. While it is unlikely that the UK VAT law will deviate from the EU VAT law radically – the UK will have more flexibility in using its own VAT law to meet its economic and social policies.

For example, the UK will have total control in setting the VAT rates and the scope of zero-rating and exemption. It could potentially reintroduce the zero‑rating for domestic fuel and power and the reduced rate for energy saving products (changes which were enforced on the UK by the EU commission in the past). It could also potentially extend the zero-rating to e-books and women’s sanitary products, both of which have been widely discussed but prevented from being implemented by the EU VAT law. Another significant change which the UK had to make recently is the VAT grouping rules, following the Skandia case (C-7/13). Businesses in the financial services sector would be particularly interested in knowing if this change will be reversed. The current UK rules on vouchers have also been scrutinized, given the still pending EU proposal to harmonize the VAT treatment of vouchers. Following secession, it is likely that the UK voucher rules will remain as they are, at least in the short to medium term.

The UK courts will no longer need to adapt the EU approach to the interpretation of UK VAT law and will have little regard to the existing or future CJEU decisions. What is unclear is what approach the UK courts would take after secession on disputes between taxpayers and HMRC over transactions which took place before the secession. Potentially, the UK courts may still need to refer questions to the CJEU.

From a more practical point of view, UK businesses which operate in the EU and vice versa may need to review their operations and the VAT compliance obligations, such as:

  • Requirement to appoint a fiscal representative for non-EU non-established entities in some EU countries
  • Invoicing and reporting requirements in respect of B2B cross‑border supplies (e.g. EC Sales list and Intrastat)
  • Triangulation simplification for chain transactions
  • B2C distance sales rules
  • Supplies of B2C e-services to customers in the UK/EU (Mini One Stop Shop)
  • Use and enjoyment rules
  • Tour Operator Margin Scheme
  • EU VAT refund rules (8th Directive refund)

Systems and operating model

Any changes may need to be carefully considered as they likely need to be reflected on the ERP systems. For example, customer master data, tax determination logics and tax codes may need to be thoroughly reviewed and updated.

Changes would also have an impact on the existing compliance process. If the potential impact is significant enough to cause any commercial, structural or operational changes, then a review of the indirect tax operating model may also need to be considered.

Conclusions

At least in the next two years, limited changes are likely to occur while the secession negotiations take place. The scope and magnitude of future changes will be determined by the outcome of those negotiations. In any case, the customs and VAT implications of cross-border transactions between the UK and the EU will change. Businesses should consider these changes carefully, plan ahead and be prepared to implement the changes in due course to minimize the disruption and remain in compliance.

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