Last reviewed 10 October 2016

John Davison, writer, lecturer and accountant, answers your questions following the UK decision to leave the EU.

VAT in the UK

Will VAT rates change?

VAT rates will entirely be in the hands of the UK Government following Brexit. The UK Government can raise or lower rates as it sees fit. For example, if the UK Government decides to reduce the rate of VAT on domestic fuel and power from 5% to 0% or remove VAT from e-books, it could do so. Currently, the UK is constrained by the EU regarding rates. Only certain items can be charged at the reduced rate and there is a minimum rate applicable for the standard rate. Also, most items that are currently zero-rated cannot be returned to the zero-rate once the UK decides to tax them. Following Brexit, the UK has complete flexibility concerning rates.

Will the UK registration threshold change?

The UK currently has the highest VAT registration threshold in the EU. It is prevented by the EU from raising the threshold significantly. When the UK leaves the EU, there will be no constraint on this or other thresholds.

Will the schemes for retailers or small businesses change?

Again, there is no reason for these to change on Brexit, but it would be possible. The EU monitors the reliefs for small businesses, but when the UK leaves the EU it will be allowed to introduce or modify all the schemes as it wishes. There could be a significant advantage gained by introducing schemes that make estimates of both direct tax and indirect tax for very small businesses similar to the South African schemes.

Any other changes?

As the UK will no longer be in the EU the way VAT is administered, the rates and reliefs will be entirely at the discretion of the UK Government. Brexit negotiations, however, may mean that the UK wishes to remain harmonised with the EU, and some of the potential changes mentioned below may not happen due to the remaining harmonisation. For example, the C88 form may continue to be used, and Intra-Community Trade Statistics (Intrastat) may remain. This will depend upon the negotiations with the EU.

Imports and exports

What will be the significant changes caused by the UK leaving the EU?

Imports and exports refer only to supplies of goods outside of the UK, and currently, outside of the EU. The major change will be that goods moved to and from the EU will be treated as imports and exports following exit from the EU. Thus, all the duty and VAT rules that apply to imports (or exports) will apply to goods moving in and out of the EU — see below for supplies of services.

Will duty rates change?

Currently, the EU sets duty rates charged on imports. When the UK leaves the EU, it can set its own duty rates. Duty rates may not move markedly in the short term. If rates are increased, it is possible that other countries will increase the duties charged to the UK. See below for supplies to and from the EU.

Will duty rates charged by other countries on UK exports change?

Again, these may not change significantly in the short term. Rates will be subject to trade negotiations. As the EU has had responsibility for trade negotiations the UK has few, if any, trade negotiations. This may make it difficult for the UK in the early years to come to trade agreements (particularly free trade agreements) with other countries.

Will valuation rules, duty reliefs and suspension regimes change?

It is not expected that there will be significant changes to these. Some rules, such as valuation rules, are determined by the World Trade Organization and are independent of the EU. There are numerous reliefs, such as Inward Processing Relief (IPR), outward processing relief, temporary admission, returned goods relief, end-use relief, etc.

Will the import document C88 still be used for imports?

The C88, Single Administrative Document, is an EU document that is used for imports into all EU countries. A replacement form will be necessary, although there is no reason why this should not be very similar if not identical to the current import document. It is not expected that import procedures will change significantly, particularly as the C88 procedure pushed control back from the port to the “factory gate”. HM Revenue and Customs (HMRC) would probably wish to retain this as it both facilitates trade and reduces HMRC’s manpower requirements.

EU supplies of goods

What duty rate will apply to supplies of goods to and from the EU?

Currently, no duty is charged on the supply of goods to or from the EU; the EU was and is a customs union. It is not known what duties, if any, will be applied. This will be one of the major areas of negotiation between the EU and the UK. Options include, no duties being applied, using the current duty rates that the EU applies to third party countries, or some other variation.

Undoubtedly, many will be hoping for no duty to be applied, but others may want duties to be applied to protect UK industries (or in the EU, EU businesses may wish for duties to be imposed to protect EU industries). For example, the car industry may want to have no duties applied so that they can export to the EU without incurring a duty cost. There may, however, be an advantage in imposing duties on cars as currently many more cars are sent to the UK from the EU than are sold into the EU from the UK. The current duty rate imposed on cars by the EU is 10%. If no agreement is reached between the EU and the UK, this is the rate that would be applied by the EU on the sale of cars by the UK to the EU. The UK could impose a 10% duty rate on cars imported from the EU, but may choose a different rate.

One relief from duty that will be very important for manufacturers (including car manufacturers) is IPR. There have been concerns that manufacturers will incur duty when they import components from the EU and this will be an additional cost, putting up the price of goods exported back to the EU or to other countries. The use of IPR will mean that no duty is payable on the components included in goods that are exported out of the UK.

Will it be necessary to complete Intrastats forms after Brexit?

Intrastats are used to gather information about the transfer of goods between EU Member States. As the UK will no longer be in the EU, there will appear to be no continuing need for Intrastats. The information that was gathered by these forms will be collected using the replacement import and export documents (the forms that will replace the C88 forms used for imports and exports currently). If there was some sort of halfway house for trading with the EU, the Intrastats could possibly be retained.

Will the triangulation facility for supplies to third-party customers still be available?

Triangulation is an administrative easement to allow the single market to operate where goods are supplied to one customer in another Member State, but are immediately supplied to another customer in another Member State. Without this easement it would be required to register for VAT in the Member State of the first customer. Triangulation is not available to businesses that are not established in the EU.

It is assumed that following exit from the EU, the UK supplier will be required to register in each country where supplies are made. This could cause a significant increase in administrative burdens. It will not impact businesses that sell goods into the EU and the customer takes possession of the goods. It will be an issue where goods are sold on to another customer, goods are diverted from a previous sale to a second customer, or the UK supplier maintains a stock of goods in the EU.

Cross-border supplies of services

How will VAT be accounted for on services supplied into the EU?

The UK will be treated as making supplies by an external third party rather than as a business established in a Member State of the EU. The “place of supply rules” will alter.

Most supplies made by a UK business to businesses in the EU are subject to the reverse charge. These are treated as supplied where the customer belongs. This does not change if the UK leaves the EU. The business customer will still be required to account for VAT using the reverse charge. It is expected that this provision will remain in the UK for services received from overseas suppliers. There are exceptions to this general rule. It is not expected that this will change when the UK leaves the EU. For example, some services are regarded, by the EU, as being supplied were physically performed. This includes services that relate to. This includes construction services and real estate agency services. Some other supplies are treated as being supplied where they are performed, such as passenger transport, cultural, artistic, sporting, scientific, educational, entertainment or similar activities, and restaurant and catering services. Where the supplies are made to businesses, it may be possible to use the reverse charge to account for VAT. In other cases and where the supply is made to a final consumer, it may be necessary to account for VAT in the Member State where the transport takes place or the service is performed and registration would be required. This will not be a change from the current requirement.

Overseas suppliers (those not in the EU) of e-services and electronic services are required to account for VAT on supplies made to consumers using an electronic form — the Mini One Stop Shop (MOSS). VAT needs to be accounted for on where the supplies are made using the MOSS form. Services are supplied to businesses into the EU would usually be accounted for by the customer using a reverse charge.

Users of the MOSS for e-services to private consumers and non-business users will have to use the non-EU scheme. This scheme differs from the scheme used by businesses established in the EU as it also includes broadcasting and telecommunications supplies. If the MOSS is not used, there will be a requirement to register in the Member State where the supply is consumed.