British departure just got even more complicatedby Leopold Traugott / April 23, 2018 / Leave a comment
As Brexit negotiations proceed, it is ever more apparent how many issues they touch upon. But after the joys of learning about the intricacies of trade rules and the passporting of financial services, this explainer deals with a topic which concerns all of us—Value Added Tax. We all pay it, but no one (yet) knows for certain how the UK’s decision to leave the European Union will ultimately impact it. As with most Brexit issues, the answer isn’t clear-cut. Different solutions are possible, each representing their own trade-offs. One thing’s certain—VAT makes exit even more complicated than it otherwise would be.
The UK, like all other EU member states, is currently part of the bloc’s common VAT area designed to facilitate trade between its members. Joining this area was not an option, but a precondition for being allowed to join the EU. This was actually the reason the UK introduced VAT in the first place.
While the EU does not prescribe a fixed standard VAT rate—it varies from 17 per cent in Luxembourg to 27 per cent in Hungary—it sets certain guidelines. There is a minimum standard VAT rate of 15 per cent, and a maximum of two reduced minimum rates of at least 5 per cent that may be applied to a limited set of goods and services. The UK has additional derogations in place allowing it to zero-rate certain products.
As the UK withdraws from the EU and its institutions, its membership of the EU VAT area is up for debate. Should the UK leave it—which treaty law suggests would happen automatically—this would have a range of implications. It would change the way British businesses trade with Europe, but provide greater flexibility for government to alter how the tax operates in the UK. There is already a domestic debate on the vices and virtues of the UK’s current VAT regime, with the government consulting on potential changes it could make to the system within the confines of existing EU law. Meanwhile, the House of Commons’ Treasury Committee under Nicky Morgan is conducting a wider inquiry on the future of VAT in the UK post-Brexit.
EU rules on VAT currently restrict the UK’s ability to offer reduced rates for certain goods and supplies—popular calls for zero-rates or reductions on domestic fuel, children’s car seats and tampons are the most prominent examples of changes possible outside the EU VAT area. Some of these restrictions may disappear soon even within the common VAT area, as the EU is…