With the vote in the UK to leave the European Union, businesses need to give consideration to trade and customs and value added tax (VAT) implications of “Brexit.”
An obvious change will be that trade between the UK and the EU countries will be recognized as imports and exports. Depending on the outcome of the negotiations, customs duty may be payable when goods move between the UK and the EU. This—and importantly the related import and export formalities—could potentially result in some impediment to trade between the UK and the EU. Currently, customs rules are almost entirely governed by EU Directives, regulations, and decisions from the Court of Justice of the European Union (CJEU). Following secession from the EU, the UK will regain control of customs. New UK law will likely be introduced to replace the EU law.
Customs duty rates could change under the new UK law. However, a dramatic rate change in the short term is believed to be unlikely. Similarly, at least in the short term, customs and international trade programs (e.g., the Authorised Economic Operator program) are likely to continue unchanged, so are other customs processes such as temporary importation and duty suspension.
Perhaps a larger issue is the UK’s trade relationship with other countries. The EU has been negotiating terms of trade with many other countries, noticeably the United States, China, and Japan—the three biggest economies in the world. Following secession, the UK would no longer be party to those agreements and would have to negotiate its own trade terms with these countries. Separate trade agreements could take a long time to conclude and this could be detrimental to the UK economy.
Similarly to customs, the UK VAT law is also governed by the EU VAT directives, regulations and CJEU decisions. Following secession, the UK will no longer need to comply with the EU VAT law. While it is not expected that the UK VAT law would deviate from the EU VAT law radically, the UK would have more flexibility in using its own VAT law to meet its economic and social policies. For example, the UK will have total control in setting the VAT rates and the scope of zero-rating and exemption. It could potentially reintroduce the zero rating for domestic fuel and power and the reduced rate for energy saving products (changes that were enforced on the UK by the European Commission in the past). It could also potentially extend the zero-rating to e-books and women sanitary products, both have been widely discussed but prevented from being implemented by the EU VAT law.
Another significant change that the UK had to make recently is the VAT grouping rules, following the Skandia case (C-7/13). Businesses in the financial services sector would be particularly interested in knowing if this change will be reversed. The current UK rules on vouchers have also been scrutinized, given a still pending EU proposal to harmonize the VAT treatment of vouchers. Following secession, it is likely that the UK voucher rules would remain as they are, at least in the short to medium term.
The UK courts will no longer need to adapt the EU approach to the interpretation of UK VAT law and will have little regard to the existing or future CJEU decisions. What is unclear is what approach the UK courts would take after secession on disputes between taxpayers and HM Revenue & Customs over transactions which took place before the secession. Potentially, the UK courts may still need to refer questions to the CJEU.
From a practical point of view, UK businesses that operate in the EU, and vice versa, may need to review their operations and the VAT compliance obligations, such as:
Any change may need to be carefully considered as they likely need to be reflected on the ERP systems. For example, customer master data, tax determination logics, and tax codes may need to be thoroughly reviewed and updated. Changes would also affect existing compliance process. If the potential impact is significant enough to cause any commercial, structural or operational changes, then a review of the indirect tax operating model may also need to be considered.
At least in the next two years, limited changes are likely to occur while the secession negotiations take place. The scope and magnitude of future changes will be determined by the outcome of those negotiations. In any event, the customs and VAT implications of cross-border transactions between the UK and the EU will change. Businesses need to consider these changes carefully, plan ahead, and be prepared to implement the changes in due course to minimize the disruption and continue to be compliant.
Read a June 2016 blog posting by the KPMG member firm in Switzerland
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