When it comes to the increasingly tortured process known as the Brexit negotiations, it seems like there’s a new development every day.
Here is Clarkson Hyde’s 2-minute guide to how VAT and other taxes will be affected by our departure from the EU.
Now that the basic terms for Brexit have been agreed, negotiations have progressed to the shape of future trading arrangements between the UK and the other 27-member states. Whatever happens, agreement on taxes levied on trade between the EU and a post-Brexit UK is going to be vital to the eventual outcome. Two of the main areas of tax that urgently need consensus are on VAT and customs duties.
These are called ‘indirect’ taxes and they are applied to individual transactions. Whereas ‘direct’ taxes are paid on the net profit (if any) made from that transaction – more about direct taxes later.
The most notable thing about indirect taxation is that the rules that govern them are largely agreed upon by all of the EU’s member states in the form of legally binding treaties. Now that we are leaving, we’ll have to figure out how these taxes will be implemented in the future.
As far as VAT is concerned, sales from EU businesses to the UK will (from the European perspective) become exports and sales from the UK to the EU will become imports.
VAT is payable on imports. It will be up to the supplying business to register for VAT in the destination country (for example, a UK business selling widgets to a French company) and the administrative costs will be significant.
Many businesses are keen to keep as much of the current streamlined system as possible however the UK government is, at the time of writing, reluctant to be bound by the way the EU does things and the EU seems reluctant to countenance anything that it hasn’t proposed or enacted itself.
That said, there are, of course, advantages to leaving. The UK has previously been able to retain the right to charge different (and lower) rates of VAT in certain sectors. For example, the UK currently charges VAT at 0% on books, children’s clothes, food and housing. There will be much more flexibility of the imposition of VAT and the ability to set rates – VAT on domestic fuel supplies and female hygiene products, both controversial and detested by many, both of which could be abolished post-Brexit.
The ability for the UK to set its own VAT will certainly introduce domestic political incentives to vary or abolish rates depending on the product or service being offers – a freedom the country currently does not possess.
The term sometimes used for customs duties is ‘trade tariffs’.
The UK has expressed its intention to do as many free trade deals as it can with as few tariffs as possible. The EU, on the other hand, tends to think of tariffs as part of the cost of access to the single market. They use these tariffs as a way to protect their internal trade from outside competition. This has had positive and negative impacts in the past.
For example, when Spanish orange growers saw increased competition from South African suppliers, they successfully persuaded the EU to increase the relevant tariffs. This protected Spanish jobs but increased the cost of imported oranges to consumers across the EU.
A possible outcome in a post-Brexit UK might be the setting of lower import duties for all countries which would please non-EU producers and provide UK consumers with cheaper products. However, this would undoubtedly cause anger amongst EU producers particularly if the UK continued to have favourable terms of access to the EU market as a part of the final leaving agreement.
The question of customs duties is the subject of much debate. Things have been complicated by the recent drive by Remain supporters to persuade the government to stay in the EU customs union.
Just how this will be achieved isn’t clear because the UK and EU seem further apart on this issue than on many others. The status of the Irish border question is also indelibly linked to this issue too.
The most common direct taxes are income tax and corporation tax. Generally, member states set their own rates so they differ widely across the EU.
The Irish government was recently forced to accept (against its will) a payment of tax of €13bn from not charging Apple what the EU deems as legal level of corporation tax. The EU said this amounted to unlawful state aid – the case ended up in the European Courts. The Irish government didn’t want Apple to pay the tax as it was more concerned with keeping its low-tax cost system that had successfully attracted many non-EU businesses to settle there.
Many people have suggested that the UK could reduce its own direct tax rates to provide a more appealing business environment. How likely this is because of the sometimes-on, sometimes-off policy of austerity is unclear particularly at a time when the EU is also talking about ways to tackle tax avoidance by big technology firms like Apple.
Under new proposals from the European Commission, companies like Google, Apple, Facebook and Amazon face paying a tax on turnover for the online services they provide. These companies have been basing their European operations in Ireland and Luxembourg because of their lower rates of corporation tax. The EU complains that countries offering very low corporation tax rates put others at a disadvantage – after all, if you were a multinational, would you incorporate in Luxembourg with a 9.5% corporation tax rate or another EU member state whose average corporation tax level is 23.3% if borders were no barrier to trade?
If you are concerned with how Brexit will affect you and your business, please do get in touch. Call us today on 020 8652 2450 or email firstname.lastname@example.org.