Brexit changes to EU VAT will substantially affect businesses

Tax professionals already anticipate an expected onslaught of VAT changes resulting from the United Kingdom’s exiting the European Union, according to a recent poll by Avalara EMEA, a leading provider of cloud-based tax compliance automation for businesses of all sizes.  51 percent project increased complexity in VAT compliance, and paying more in VAT and customs (68%).  While 53 percent of those polled expect substantial impact on their businesses, more than half have not yet begun planning for Brexit at all (54%).

“Now more than ever, VAT automation becomes key to ensure businesses are prepared for the new requirements of Brexit,” said Richard Asquith, VP of Global Indirect Tax, Avalara EMEA.  “While the timing remains uncertain, businesses can start to prepare now by ensuring they are set up with the right technology.  VAT automation platforms ensure organisations remain compliant with regulations and do not suffer the burden of huge losses in the midst of navigating a new trade environment.  Updating systems now can ensure a seamless transition once Brexit arrives.”

The poll also uncovered the following findings:

  • 49% predict Brexit will happen by the end of 2020, a ‘soft exit’
  • Half anticipate the UK will adopt a Canadian trade model (World Trade Organization/Free Trade Agreement)
  • Poll respondents believe that the highest risks Brexit will bring for the industry include:
    • 63% – Preparedness of HM Revenue & Customs
    • 55% – Increases in customs and other border costs
    • 45% – Adapting internal enterprise resource planning (ERP) systems

EU VAT Implications

Avalara anticipates many areas of shared VAT practices will be reviewed and revised as Brexit negotiations take place.  Some of those include the following:

  • Legislation – Upon completion of the exit negotiations, the UK will no longer be required to follow the EU VAT Directive or European Court of Justice (ECJ) rulings. Instead, the UK’s VAT Act will take supremacy. The UK government will be free to amend the Act to reflect its fiscal policy objectives.
  • Exit from the single market – The major VAT change for UK companies following Brexit will be the loss of their intra-community trading status. Instead of zero-rating B2B sales to EU companies, transactions will be treated as imports into the EU, and subject to EU VAT.
  • UK to join the EEA? – It is possible that the UK could become a member of the European Economic Area, which participates in the Single Market encompassing the free movement of goods, services, people and capital. This would give the UK many of the benefits of free trade with the EU, although it would lose the right to have a veto or vote over any EU laws passed that are imposed on EEA members.  The EEA does not cover indirect tax, so the UKwould remain outside of the EU VAT regime.
  • Freedom to set UK VAT rates – The UK will no longer be constrained by the EU VAT Directive on setting its VAT rates. The UK will therefore be uninhibited to change reduced VAT rates on key products like domestic fuel, women’s sanitary products and e-books.
  • EU VAT recovery – UK companies will lose the right to use the simplified 8th Directive online VAT recovery system for their EU VAT reclaims. Instead, since they will be non-EU companies, they will have to resort to the paper-based 13th Directive regime. This is slower, and prone to challenges from the tax authorities.

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Poll conducted on 13th September 2016 at Avalara’s VAT Summit with 60 VAT specialists.