2018 Weaponising VAT

Brexit. VAT fraud. Austerity straitjackets. Global tax wars.

These are the colliding dynamics which in 2018 will lead to the UK, and worldwide governments, to undertake drastic measures on VAT and other taxes. This could include an emergency measure to relieve importers/exporters of potential Brexit VAT liabilities, through to the European Commission up-ending the entire VAT system to fight €50billion in VAT fraud.

The future trading model for post-UK Brexit looks as unresolved as on the date of the 23 June 2016 referendum. Indeed, with the membership of the Single Market and Customs Union ruled out, the options are shrinking. This won’t begin to become clear until the second half of the year progresses, and the Free Trade Agreement talks get going. A 2-year+ transition agreement, or a temporary revocation of the Article 50 exit, is likely, which would keep the UK within the EU VAT Directive and ECJ’s reach.

But companies are now starting to plan for Armageddon – a hard Brexit onto WTO rules, including the full imposition of import and export VAT on EU trade. This could have severe cash flow effects on companies selling or buying from Europe. We expect the UK government to be creative in this area, perhaps introducing an import VAT deferment scheme.

Having exhausted the potential to raise headline VAT rates in the face of continuing austerity, governments will look at more reduced VAT rises – Romania, Netherlands and Norway have already announced rises for 2018. Switzerland is to cut its standard VAT rate from 8% to 7.7% on 1 Jan 2018. The UK, post-Brexit and free from EU rules on VAT rates, will now be in position to loosen reduced rates as alluded to in the 2016 referendum.

The excitement around the six Gulf States’ 2018 VAT launch has been tempered as four of the countries look likely to delay their roll-outs until 2019. In Saudi Arabia and UAE, companies are shifting to panic stations as they realise they are ill prepared for even the basics – such as preparing a compliant VAT invoice.

The drift towards live transactions reporting to the tax authorities will continue, but may be tempered by some overly ambitious launch dates. Norway and Hungary look likely to delay their respective 2018 SAF-T and live invoice reporting proposals.

However, with Brexit looming, the UK may have to delay again its own plan for live VAT and tax reporting. The ‘Making Tax Digital’ programme, which includes transactional reporting on all taxes, has already been postponed from its 2019 launch. HMRC has recently estimated that Brexit will create up to 40% additional work for it over the next two years – so a delay on MTD is probable.

The major debate for 2018 will be the taxing of digital services to consumers. The OECD and EU are under pressure to accelerate their own proposals on taxing electronic services provided by large marketplace firms. There well may be conflict between the two, and the EU may well have to back down under US protection of its internet giants.

2018 will be a major challenge for the European Commission’s radical plans to create a single VAT area on B2B transactions. This aims to tackle the stubborn €50bn VAT fraud problem. There will be a lot of political pressure from member states to water down some of the EC reforms – especially from Germany. As a result, the target 2022 implementation of a destination-based VAT system will inevitably slip given the EC’s aggressive timetable. But progress towards a Mini-One-Stop-Shop on EU B2C e-commerce should see better fortunes.

2017 promised huge gains on automation in taxes. There has been a lot of progress – but it hasn’t come quickly enough. This is pushing the likes of the EU to escalate measures on a trans-national level. This will be the theme of VAT and all taxes for 2018 – including the fallout from the Paradise Papers tax scandal.

What is clear, is that more automation of tax departments is probably one of the best defences. Despite the uncertainties of Brexit and the like, many companies are actually bringing forward investment in ERPs and tax reporting software, so that they can react in real-time to whatever comes over the barricades next.

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