“Brexit” is, of course, the new shorthand term for a possible British exit from the European Union. Obviously, this newsletter is not the place for political commentary. However, there is no doubt that such an exit would have a significant impact on the current UK VAT system. Now that an ‘in/out’ referendum is on the horizon, it is worth taking a moment just to reflect on some of the possible consequences if the UK did choose to leave the EU.
EU VAT rules often seem to get a bad press. It is often observed (correctly) that they prevent the UK from extending the range of goods and services which can be treated as zero-rated or VAT exempt. The recent problems which have arisen following the introduction of the so-called “VATMOSS” scheme for digital sales within the EU have also (quite rightly) come in for criticism.
However, set against that, it is worth remembering that EU membership also brings certain benefits. Generally, the VAT reporting obligations for intra-EU transactions are much less onerous than those involving non-EU countries. Once goods are in the EU, they can generally be moved around relatively freely. In respect of services, most intra-EU business-to-business supplies are now taxed on a reverse charge basis which is a significant simplification.
The main EU VAT Directive also serves as a ‘shield’ – protecting the various ‘social’ VAT reliefs in connection with health, welfare, education etc.
A ‘stand-alone’ UK would be almost certain to retain a VAT regime of some sort. VAT (or GST) now forms a key part of the tax system in over 150 countries worldwide. It is simply too cheap to administer and collect for government to consider scrapping it. However, outside the EU, the UK would have much greater freedom to change the scope of the tax and the detailed rules governing it.
It will be fascinating to see how these and other tax issues are reflected in the campaigns leading up to the referendum.