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Brexit – UK VAT and tax opportunities


Brexit – UK VAT and tax opportunities

Coverage of Brexit has been dominated by concerns around the potential negatives and uncertainties facing the UK economy as it prepares to leave the European Union.  This has been compounded in recent weeks by the likelihood of a hard Brexit, with UK companies facing restricted access to the EU’s Single Market, Customs Union and immigrant workforce which have underpinned the UK’s relative strong economic performance in the past four years.

However, the UK will gain a range of new freedoms to its benefit when it leaves the EU – now likely to be March 2019.  This includes more control over tax policies which are currently set or heavily influenced by EU directives and rules.  These are discussed below.

Leaving the EU VAT regime

The UK will no longer be required to follow the rules set by the EU VAT Directive.  This would provide more control on the setting of reduced VAT rates over a range of products and services.  For instance, the UK could investigate introducing a new range of consumption taxes not permitted by the EU.  Or it could explore extending VAT to the currently exempt financial services.  An amalgamation of the exiting Insurance Premium Tax into the UK VAT system would become possible, providing a cost-saving simplification.

Escaping ECJ rulings

The UK would also no longer be subject to the VAT rulings of the European Court of Justice (ECJ). Examples of where this could benefit the UK include:

  • The UK could ignore many judgements on domestic-only direct tax group relief which had benefited national businesses over foreign entities
  • The UK could gain on compensation payments on compound interest litigation – the Littlewoods case
  • The UK could pressure to implement the 2005 Anderson ECJ ruling imposing irrecoverable VAT on the outsourced insurance back-office industry.  This could help attract and retain international insurance companies looking to make avoid input VAT losses in the remainder of the EU.

Avoiding EU State Aid surveillance

The European Commission is increasingly using EU State Aid rules to curtail favourable tax advantages and rulings given to corporations by EU member states – especially where used to entice multinationals to relocate.  For example, the UK came under significant pressure two years ago to reform its highly successful Patent Box tax regime which the EU considered too aggressive in attracting patent-related investment from other EU states.

However, the UK may not have an entirely free hand in this area as the EU is likely to threaten retaliatory measures or restrictions over EU trade should the UK deviate significantly from the EU rules.

Avoiding other EU tax measures

The UK has typically been the most powerful opponent of several the EU’s more controversial tax measures which the UK considered out of line with its own tax liberalising agenda.  These have included the Financial Transaction Tax and the harmonisation of EU corporate taxes (Common Consolidated Corporate Tax Base - CCCTB).

Post Brexit, the UK will no longer have to lead brusque opposition to these proposals, and not risk their imposition on UK businesses.

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VP Global Indirect Tax
Richard Asquith
VP Global Indirect Tax Richard Asquith
Richard Asquith is VP Global Indirect Tax at Avalara, helping businesses understand their compliance obligations as they grow globally. He is part of the European leadership team which this year won International Tax Review's Tax Technology Firm of the Year. Richard qualified as an accountant with KPMG in the UK, and went on to work in Hungary, Russia and France with EY.