In 2015/16, over £100 billion was raised through VAT, making it the when for the Treasury. As such, the United Kingdom is extremely unlikely to abolish VAT after we leave. That said, there is simply not enough time for the Treasury to come up with a new tax system in place VAT before we leave the EU.
In addition, there is potentially two variant outcomes, one set of conditions that might apply if we are to be inside the single market and another set of conditions if we are not. Which of the two scenarios we will find ourselves in is not going to be clear for some time.
Because of this there may be considerable uncertainty for some time.
Besides this there is no precedent for “triggering” article 50. Greenland did withdraw from what was then the EEC in 1985 whereby a “special case” was made which provided for a negotiated exit. In this instance, however, there was only one issue – fisheries – and this alone took two years to conclude. In short, it’s going to be a long and slow process.
Bearing this in mind, we’ve attempted to shine some form of light on the issue – in an effort to provide an understanding of the VAT landscape as it currently appears:
- VAT will almost certainly remain. We may call it something else but it will still exist.
Legal issues will have highly practical consequences.
- There will be no bar on the UK raising other indirect taxes. We can’t do that now, but we will in theory be able to do that after we are no longer part of the EU. Although the UK will withdraw from existing treaties some of the principles may still have an effect. So, certain EU principles (proportionality discrimination, non-retrospectivity) may survive after we leave the EU.
- Regulations – There simply won’t be enough time to change these. The Treasury will not have time to re-write them. As a result, these will almost certainly remain after we leave the EU.
- Directives – These will also be likely to remain in place, although the UK may well change the restriction on “other” indirect taxes. The government of the day will probably need this to be removed in order to raise money through other indirect taxes.
- There is room for all member states to extend the two year period. This may be helpful, and indeed necessary, given the time required for negotiation when Greenland left – and they only had one issue to agree on.
- We will almost certainly experience a period of volatility and this may last for longer than the “negotiation” period.
It’s quite clear already that there is a consensus that it is unlikely that VAT will disappear after we leave the EU. It is also likely that we will still call it VAT. A lot of the principles of the “old“ VAT system will remain and certainly still apply to the “new “ VAT.
This situation has come about partly because these principles have already been imported into our law and partly because there is not enough time to rewrite the VAT regulations.
One of the changes could be that the UK will now be able to raise other “indirect” taxes. This may be needed simply to raise money. It could be some time before we have a complete picture.
If we look for a precedent, however, it is not unheard of for a country outside of the EU to have their own version of VAT. There are few other systems around the world. Both Australia and Singapore have their own VAT systems. The Australian model however, known as GST, has been described as one of the most complex ever devised by man. Surely a good argument against unnecessary changes and amends.
What will change?
Some things will almost certainly change when we leave the EU:
- Our citizenship of the EU will go.
- Membership of the single market will go, at least in the terms of our membership of the EU. (We may negotiate a separate membership outside the EU).
- Free movement of capital.
- Obligation to pay membership fees.
What will not change?
- VAT as we know it will almost certainly stay with us for some time to come.
- Existing EU law already in our law will almost certainly remain.
- UK firms will still need to satisfy state aid rules.
What are the Provisions of Article 50?
Article 50 says (summarised):
- Any Member State may decide to withdraw from the Union in accordance with its own constitutional requirements.
- A Member State which decides to withdraw shall notify the European Council of its intention. In the light of the guidelines provided by the European Council, the Union shall negotiate and conclude an agreement with that State, setting out the arrangements for its withdrawal, taking account of the framework for its future relationship with the Union. That agreement shall be negotiated in accordance with Article 218(3) of the Treaty on the Functioning of the European Union. It shall be concluded on behalf of the Union by the Council, acting by a qualified majority, after obtaining the consent of the European Parliament.The arrangements, therefore for withdrawal take into account two things:
- The arrangements for its withdrawal (exit)
- The framework for its future relationship with the Union (the future)
It’s fair to say, the untangling of the UK from the EU might turn out to be the easier part of the process. Agreeing the future framework for its future relationship with the Union may take much longer and volatile conditions are likely to remain for some time.