As soon as it takes effect, the UK's exit from the European Union will end its membership of the common system of VAT as set out in Council Directive 2006/112/EC of 28 November 2006. VAT Brexit will also put an end to all the related agreements concerning in particular the VAT refund procedure for foreign companies and the administrative cooperation for combating fraud and recovering the tax.
This being said, the EU VAT system would not (at least immediately) cease to apply to the UK since the Directive’s provisions have already been transposed into national law. Only VAT regulation acts, which are directly applicable to the Member States, would automatically cease to apply on Brexit.
Indeed, the UK would be free to remove the EU VAT system from its legislation but its replacement by a different tax on consumption would make cross-border economic relations particularly complex.
In case of retention of the current VAT rules, the UK would however need to adjust its legislation to take into account its new status as a third-party country with regard to the functioning of the European system.
If we rule out, in the immediate future, the hypothesis of the UK removing VAT, the main consequences of Brexit that can be anticipated would be the following.
I - The effects of the status of third-party country in established legislation
In regard to the general rules of taxation, the status of third-party country with respect to the European Union would, as the most significant effect, modify the tax treatment of deliveries of goods between the UK and the Member States of the European Union. These deliveries would thus become exportation/importation transactions rather than intra-Community deliveries and / or distance sales. In particular, VAT (and any customs duties) would have to be paid when the goods are introduced into the EU territory and vice versa. Customs formalities would replace declarative obligations attached to intra-community transactions.
For services, the change would be less spectacular since, with a few exceptions such as B to C intangible services (which are not subject to VAT in the State of an EU supplier should the consumer be established outside of the EU), the territoriality rules applicable to the services are not different according to whether the supplier of a service and the customer are established in or outside the EU.
Access to the Mini One Stop Shop (MOSS) for declaration formalities and the payment of VAT on electronic services could still be possible for British companies but under the specific conditions provided for suppliers of services established outside the EU. Lastly, the flow of UK/EU services would no longer have to feature in the recapitulative statements that the suppliers of services established in the EU must fulfil when the taxable customer is established in another Member State.
N.B.: banks and insurance companies established in the EU could take advantage of the services provided to customers established in the UK since, as with all the services of this kind provided to customers established outside the EU, this scenario would entitle them to recover the input tax, whereas their exemption prohibits any recovery of tax charged on expenditure when the customer of the service is established in an EU Member State.
Concerning the formalities to be completed with regard to VAT, British companies could be obligated in certain Member States to appoint a tax representative to handle all their obligations in these States, unless the UK maintains a level of administrative cooperation with its former partners equivalent to the one in place between EU Member States.
Furthermore, the electronic procedure for the refund of foreign VAT foreseen for EU Member States would no longer apply to the refund of VAT paid in the EU by a British company or to British tax paid by a European company. Within the EU Member States, British companies could obtain the refund according to the procedure foreseen in the 13th VAT Directive for non-EU taxable persons but the Member States could make the refund applicable upon UK reciprocity rules.
II - The first expected adjustments from the UK standpoint
Even if it is decided to keep the main part of the existent EU VAT system, the UK would be free to adjust certain aspects according to its own interests.
For example, it could freely fix VAT rates, whereas those applicable in the Union are restricted (the standard rate cannot be less than 15%, the reduced rates, limited to two and at least 5%, can only be applied to a list of goods and services listed by the directive).
But a number of exceptions already apply in the UK, which, for example, has been able to maintain a rate of 0% to a number of goods and services. A general fall in the rates would moreover, with a few exceptions, mainly have an impact on domestic consumption and in practice benefit all suppliers, both national and foreign, due to the general application of the principle of taxation (including the rate) at the place of consumption.
The other rules that the UK could be tempted to adjust can be identified, as an initial approach, by examining judgments through which the European Court of Justice (ECJ) has compelled this State to comply with European regulations concerning issues such as:
- the scope of the exemption applicable to banking, financial and insurance transactions
- the application of reduced rates (0%) on social or environmental grounds
- or rules applicable to customer loyalty programmes.
The UK could also try to gain a competitive advantage for the benefit of its nationals by applying, in certain sectors, a different system to that imposed in EU Member States, for example the margin scheme that applies to travel agencies.
But it should be recalled that the European directive offers its Member States the possibility to tax on their territory services for which the place is in principle situated outside the EU, but which are actually used or enjoyed in their own territory ("use and enjoyment rule").
III - Questions of an institutional order
In the short term and until its actual exit from the EU VAT system, there are several questions to be answered:
- To what extent could the UK anticipate its exit by adopting legislative changes that do not comply with the framework imposed by its EU membership? The UK could wager on the lack of interest to act, in particular of the European Commission, to introduce any infringement procedure before the ECJ since the sentence would, in practice, be time-limited.
- How can the competence of the ECJ be assessed and the UK's right to intervene in the court proceedings underway on the actual date of the UK's exit? It is clear that the legitimacy of the UK to assert its point of view on the questions of interpreting the provisions of the directive is or will become disputable on the approach of its exit from the VAT system.
- Lastly, what will be the effects of the scheduled exit of the UK on the negotiations and/or decisions of the Council of the European Union, which are subject, in matters of VAT, to the unanimity rule? In particular, this question concerns the large-scale action plan launched on 7 April 2016 by the European Commission, the first parts of which (particularly concerning e-commerce) should in principle be discussed from 2016 onwards by the Member States. This question also concerns Member States derogations demands that require a unanimous agreement of the EU Member States.