Brexit: will UK leave the EU VAT regime?

When the UK leaves the European Union, will it also exit the EU VAT regime? Perhaps not.

By March 2019, the UK is scheduled to exit the EU.  This includes the UK no longer being part of the EU VAT system.  This will mean fundamental changes to the VAT, customers reporting and cash-flows on trade between the UK and the the EU. In 2016, the UK exported £241bn to the EU; it imported £312bn.

Currently, B2B trade between the UK and EU generally enjoys nil-rated VAT status.  Instead of the seller charging and collecting VAT, the buyer records a matching sale and purchase in their VAT return.  These cancel each other out – meaning there is no cash flow implications for either party.  This simplification is known as the reverse charge mechanism.

2 potential scenarios for UK post Brexit VAT

1. UK becomes a non-EU country for VAT. This is the most obvious scenario whereby the sales of goods between the UK and the EU incur import VAT and customs duties – assuming the UK leaves the Customs Union too. This would likely lead to: a ballooning administrative burden on importers/exporters; significant delays at ports on the movement of goods as they are checked and processed through Customs; and potential large cash flow delays on VAT payments and reclaims.
2. UK associated EU VAT membership. In the UK’s recently published ‘Future Customs Arrangements’ paper, laying out objectives for post-Brexit customs arrangements, it alludes to exploring not switching UK-EU trade to non-EU status, and incurring an unwelcome compliance burden and cash-flow risk. Instead, it says: “The Government is actively considering ways in which to mitigate the impacts of such a scenario.” The paper encourages other EU states to be open to similar thoughts.  To be integrated in the EU VAT regime post Brexit, the UK would have to remain harmonised with the EU’s VAT Directive and subject to the final say of the European Court of Justice on VAT matters.

Without a doubt, the introduction of import VAT, customs formalities and cash payments will present the UK and its EU trading partners with one of the single largest challenges to a ‘successful’ Brexit.  So both sides will have an interest in exploring novel structures to retain the UK within the system in some fashion.  However, the politics of accepting the continuing rule of the ECJ may prove to be too bitter a remedy for the UK.  We shall see.

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