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Brexit and VAT – what do we know so far?

Gareth Bevan 2 February 2017 No comments

Brexit has been dominating the news over the past couple of weeks following two landmark events. Firstly, there was Theresa May’s speech in which she set out 12 objectives for Britain in the impending exit negotiations.  Then there was last week’s Supreme Court ruling that Parliament had to approve the triggering of Article 50 which commences the formal 2 year negotiating period for agreeing the terms of Britain’s exit from the EU.

But what do we really know so far in terms of the VAT implications for UK businesses of Brexit? Well the short answer is not very much. We won’t of course know for certain the full VAT impact until the negotiations are concluded, which won’t be before 2019 at the earliest.

Theresa May’s speech

Whilst it is all guesswork at this point what the outcome of Brexit will be, many of the issues to be negotiated will have a VAT impact for businesses.  The areas where some degree of clarification was provided in Theresa May’s speech were:

  • EU law
  • Single Market
  • Phased approach

EU Law

She confirmed that the body of existing EU law will be converted into British law stating “the same rules and laws will apply on the day after Brexit as they did before.”  This is important from a VAT perspective since all UK VAT rules and regulations are derived from EU VAT law. There will therefore be no change overnight in the VAT rules businesses are required to comply with.  Following Brexit though Parliament will be free to change UK VAT law as it sees fit.

She also said “we will take back control of our laws and bring an end to the jurisdiction of the European Court of Justice in Britain.”  Decisions of the CJEU in VAT cases will therefore no longer be binding on the UK.  It is however likely that CJEU decisions will be treated as “persuasive authority” in so far as they relate to UK VAT legislation that is not changed post-Brexit.

Single Market

Theresa May stated that Britain will leave the Single Market.  In its place she is seeking a Free Trade Agreement with the EU that allows for “the freest possible trade in goods and services between Britain and the EU’s member states.”  This sounds like good news for UK businesses involved in cross-border trade with the EU.  However what the future relationship with the EU will actually look like, and mean in terms of VAT compliance and costs, is anybody’s guess at this stage.  It will all be determined by how successfully the negotiations progress.  Many believe though that the EU will not want to send out the message that life outside the EU is better than in it!  It would therefore be no surprise if VAT measures relating to EU trade become more complicated rather than simplified following Brexit.

Phased approach

One positive for businesses to take away from the speech is that Theresa May is keen to ensure there is a phased process of implementation of new arrangements once the Brexit negotiations have concluded.  She indicated that she wants Britain’s new relationship with the EU to be agreed as part of the 2 year Article 50 process.  This timing may be ambitious but at least businesses have some comfort that they will be given time to plan and prepare for the changes.

Watching Brief

Businesses should aim keep a watching brief on Brexit negotiations once Article 50 has been invoked.  Changes in Britain’s trading relationship with the EU could have significant VAT implications both in terms of changing compliance obligations and potentially increased VAT costs. We will closely monitor developments over the course of Brexit and keep you up to speed with the impact from a VAT angle.  Keep an eye out for our future posts on the VAT issues as they emerge.