Speculating Vat Tax Implications Post-Brexit
By John Napolitano
I was fortunate to spend my summer working at KPMG within its Tax Division. In light of my experience and the global significance of Brexit, I decided to focus my first blog post on the potential tax consequences of corporations’ operating in the UK post-Brexit. Tax implications vary significantly for corporations contingent upon its operations and the different political environments its business touches. For example, a corporation’s tax position would differ widely whether its business operated only domestically rather than globally. Depending upon the scale of its operations, corporations are vulnerable to liability if not appraised to various tax laws across different localities and global markets in which it does business. Since a significant amount of KPMG’s clients compete globally, it is extremely important as tax professionals to make sure that clients are aware of the ever-changing variations in policy locally, nationally, and globally. Action in light of certain policy can impact businesses’ global position and can lead to its success or failure. Therefore, the recent vote for Britain to leave the EU has created much uncertainty in the global business community as to what comes next. One of the interesting topics of Brexit is the corporate tax implications. Part of this interest is the uncertainty looming from the unprecedented departure of UK from EU. This blog post will focus on the potential implication for VAT, or “value added tax”, in light of Brexit.
Free trade has been a touchstone of the EU.[i] In implementing its policy in the seventies, policymakers in the EU concluded that “multiple different sales taxes across the EU would have distorted competition within the single market and inhibited [ ] free trade.”[ii] Upon implementation, VAT tax was harmonized across EU to allow the free movement of trade to EU.[iii] For those unaware, VAT is a consumption tax placed on a product whenever value is added at a stage of production and at final sale.[iv] Over the years the VAT tax has become one of the largest revenue generating taxes for the British government.[v]
That being said, experts speculate post-Brexit that the VAT tax is unlikely to be abolished or significantly altered. However, there are definitely interesting implications from the UK’s exit. Currently, the way in which UK VAT operates is tied directly to its EU membership. For example, UK VAT law is governed by the EU VAT directives, EU regulations, and Court of Justice of the European Union (CJEU) decisions.[vi] With Brexit, therefore, the UK will no longer be compelled to comply with the EU rules. As stated previously, the UK is not expected to drastically deviate from the EU VAT law, but following its succession, the UK will have its own flexibility in determining its VAT laws.[vii] Logically, any revisions to its current form will be in response to the UK’s individual economic and social policy objectives, not the EU’s. One of the major implications of this is that Britain will be able to set its own VAT rates and exemptions.[viii] And depending upon whether UK legislature elects to change these, any amendments could have substantial consequences either positive or negative to businesses operating in the UK. Also, unless further legislated, changes in such policy may also mean different compliance and reporting measures for businesses, which in turn means allocating additional resources and cost to compile with UK’s newly adapted policy. Ultimately, there are arguments on both sides that this type of freedom may be beneficial for corporations. However, currently, these arguments are only speculative and only time can tell the true impacts. Naturally, businesses are trying to forecast for the future, but given the potential variability, it is extremely difficult at this point.
At this time, any tax changes in light of Brexit are not imminent. Therefore, as previously stated, the potential impacts can only be acknowledged and evaluated at a very macro level. This type of speculation can create anxiety for businesses operating in the UK. Therefore, one of the only things that businesses can currently do is to try to be involved throughout the process as much as it can be. Business will continue to lobby for changes that will ensure success of its business position in the UK. Representatives most likely will try to ensure that the UK government has a business-friendly tax environment. In order to help alleviate some of the anxiety of post-Brexit, the British Government should provide timeframes and roadmaps to any potential future legislation. Only then would businesses be better able to assess the potential impact on its operation and act accordingly. These are extremely interesting times to be a legal professional in the tax industry.
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[i] Tax and the Implications of Brexit, Allen & Overy (Feb. 2016), http://www.allenovery.com/SiteCollectionDocuments/AO_05_Brexit_Specialist_paper_Tax.pdf.
[ii] Id.
[iii] Id.
[iv] Investopedia, http://www.investopedia.com/terms/v/valueaddedtax.asp.
[v] EU: Trade and Customs, VAT Implications of Brexit, KPMG (June 27, 2016), https://home.kpmg.com/xx/en/home/insights/2016/06/tnf-eu-trade-and-customs-vat-implications-of-brexit.html.
[vi] What are the Immediate Tax Consequences of the UK's Vote to Leave the EU in the So-called Brexit Referendum?, DLA Piper (June 29, 2016), https://www.dlapiper.com/en/us/insights/publications/2016/06/brexit-how-might-taxes-be-affected/.
[vii] Id.
[viii] EU Referendum: How Would Brexit Change VAT and Import Duties? The Guardian (Mar. 22, 2016), https://www.theguardian.com/small-business-network/2016/mar/22/eu-referendum-brexit-change-vat-import-duties.