What Happens To VAT After Brexit?

In 2010, the then Lord Chancellor Kenneth Clarke suggested that the standard rate of VAT was likely to increase from 17.5% to 20%, which it did indeed do on January 4th 2011. At the time, little or no attention was paid by the UK media to the fact that something similar was happening across the EU. The rise in the UK standard rate was part of the process of tax harmonisation across the Union, something that was first proposed in 1977.

Where this is discussed, if it is discussed at all, it is always acknowledged that the EU benefits from this tax, but that the member states only pass on a mere fraction of the revenue to Brussels.

But the full details are worth closer scrutiny.

A study on the possible impact of Brexit on the EU budget, commissioned by the European Parliament’s Committee on Agriculture and Rural Development and authored by the Jacques Delors Institute, reveals that “Member States VAT-based contributions, derived from the application of a uniform call rate to a notionally harmonised VAT based determined uniformly for the Member States (accounts for) 12% of total EU revenues”

That will amount to €18.94 billion in 2017 (based on the budget for the year of €157.9 billion). The UK has traditionally paid more in VAT payments than any other member state - indeed in 2010 more than 20% of EU revenue on this one budget line came from British taxpayers.

So what are the implications for UK VAT after Brexit? London based law firm Allen and Overy have suggested that there are a number of options ranging from replacing VAT with a completely new tax, to keeping it aligned to the EU standard rate.

VAT has therefore been harmonised within the EU since 1977. Following Brexit, the UK would sit outside of the territorial scope of EU VAT. It would therefore be open to the UK to change how VAT is charged in the UK, or even to replace it with an entirely different tax.

Allen & Overy: Brexit – legal consequences for commercial parties (Feb 2016)

Whilst acknowledging the short-term vote winning option of a cut in VAT, Allen and Overy suggest that “The most tangible consequence of Brexit would likely be the imposition of “import” VAT when goods enter the EU from the UK, and when EU goods enter the UK.”

Introducing a new tax would be a complex and expensive option, and it is also the case that significant differences in VAT rates between the UK and the continent would create import/export imbalances which would adversely affect the UK economy as it imports far more than it exports to Europe. Therefore, little is likely to change, although an extension of the scope of 'exempted goods' would likely be the easiest and most popular means of relieving the tax burden for many.

It may be the case, however, that HMG would prefer not to mention the issue, and carry on collecting the tax as normal, thus enjoying an annual windfall.

An interesting footnote in the VAT debate is that of the ‘rebate on the rebate’ that is enjoyed by three member states; Germany; the Netherlands; and Sweden.

To compensate them for the fact that the UK receives a much-vaunted rebate from the EU, these three receive an effective rebate of 75% on their VAT contributions to the Union’s budget.

Unlike the UK, they have also been able to access the European Globalisation Adjustment Fund, which is used to retrain EU workers who are laid off when their companies relocate, as well as unemployed people in economic black spots.

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Since its establishment in 2007, the EU has paid out almost €600 million in support of 138,888 redundant workers and 2,944 persons not in employment, education or training, from 21 member states.

The UK, which has been hard hit by relocation of industry to other EU states and beyond, has received not one single penny from this fund. The reason for this is that just one application would have led to cancellation of the UK rebate.

And so one could argue that the UK rebate has been partly funded by taxpayers through a disproportionately high VAT contribution to the EU, and by redundant British workers who have not received the assistance they should have been entitled to at the time they most needed it.

That adds up to a very expensive rebate…

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Gary Cartwright

Gary Cartwright

Gary Cartwright is publishing editor of EU Today. 

An experienced journalist and published author, he specialises in environment, energy, and defence.

He also has more than 10 years experience of working as a staff member in the EU institutions, working with political groups and MEPs in various policy areas.

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