The Queen’s speech on 21 June 2017 has laid down the legal path to Brexit. There are eight separate pieces of Brexit legislation on immigration and trade, confirming that the clean break from the EU could indeed result in removing the UK from the Single Market and the Customs Union by March 2019.
This news has underlined the uncertainties that UK companies will face with restricted access to the EU Single Market. This was exposed by a recent Ipsos MORI Captains of Industry report highlighting that 58 per cent of top executives believe the vote to Leave has already had a negative impact on their business.
However, the UK will gain a range of new freedoms to its benefit when it leaves the EU, including more control over tax policies, which are currently set, or at least heavily influenced by EU directives and rules.
So, what do businesses need to understand about VAT and tax policies in the context of Brexit?
Leaving the EU VAT regime
The UK will no longer be required to follow the rules set by the EU VAT Directive, which will allow more control over the setting of reduced VAT rates over a range of products and services, and allowing wider offset of VAT charges.
For instance, the UK could investigate introducing a new range of consumption taxes not permitted by the EU, such as luxury taxes or turnover levies. Alternatively, it could explore extending VAT to the currently exempt financial services sector. An amalgamation of the exiting Insurance Premium Tax into the UK VAT system would also become possible, providing a tax raising efficiency and handing simplification to the financial services sector.
Escaping ECJ rulings
The UK would also no longer be subject to the VAT rulings of the European Court of Justice (ECJ). How could this benefit the UK?
- The UK could ignore judgements on domestic-only direct tax group relief, which has benefited national businesses over foreign entities.
- The UK could gain compensation payments on compound interest litigation. Take the Littlewoods case as an example – over a period of 31 years, Littlewoods overpaid around £204 million in VAT to HMRC. HMRC repaid with simple interest totalling over £250 million. However, Littlewoods made an unjust enrichment claim of around £1 billion arguing that the compound interest on the VAT overpayments far exceeded simple interest.
- The UK could avoid implementing the 2005 Anderson ECJ ruling. The European Court of Justice ruled that EU insurers that have outsourced claims handling and other back office functions face a large and irrecoverable VAT bill. This ruling is yet to be imposed by the UK and Ireland in anticipation that it may be reviewed. Post-Brexit, the UK may potentially be alone in avoiding the irrecoverable charge on insurance, which would help attract global brokers and insurers.
Avoiding EU State Aid surveillance
The European Commission is increasingly using EU State Aid rules to curtail favourable tax advantages and rulings given to corporations by EU member states – especially where used to entice multinationals to relocate. For example, the UK came under significant pressure two years ago to reform its highly successful Patent Box tax regime, which the EU considered too aggressive in attracting patent-related investment from other EU states.
However, the UK may not have an entirely free hand in this area as the EU is likely to threaten retaliatory measures or restrictions over EU trade should the UK deviate significantly from EU rules.
Avoiding other EU tax measures
The UK has typically been the most powerful opponent of several of the EU’s more controversial tax measures, which the UK considered out of line with its own tax liberalising agenda. These have included the Financial Transaction Tax and the harmonisation of EU corporate taxes (Common Consolidated Corporate Tax Base – CCCTB). Again, a UK outside of the EU will be exempt from these measures, which would improve its standing as a global base for multi-nationals.
What does this means post-March 2019? The UK will no longer have to spend time leading strong opposition to these EU proposals in order to ensure they are not imposed on UK businesses. Instead, the government can focus on building the right tax agenda and measures specific to the UK.
Overall, many UK businesses believe they will just have to manage with the Brexit uncertainty. However, there are elements to Brexit that could benefit companies and one of these areas is policies on both tax and VAT. Entrepreneurs and business owners should start exploring those options available to them now to ensure they are on the front foot of the clean break in eight months’ time.
Richard Asquith is Global VP – Indirect Tax at Avalara.