The House of Commons European Scrutiny committee has issued its report on ‘VAT: EU proposals for reform and the implications of Brexit’, seeking more detail from the Treasury about the government’s desired VAT arrangements for cross-border trade between the UK and the EU after Brexit.
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Parliament UK writes:
The UK’s system for value added tax (VAT) is based to a large extent on the EU’s VAT Directive1 and supplementary legislation. The purpose of the Directive is to facilitate the free movement of goods and services within the Single Market, notably by harmonising when and where the VAT liability arises (especially on cross-border sales); restricting which VAT rates national governments can apply to ensure a level playing field; and eliminating the need for controls on intra-EU trade of goods to ensure the correct amount of VAT is paid.
Since October 2017, the European Commission has tabled four separate proposals for a substantial overhaul of the way the EU’s VAT system has operated, in one form or another, since 1992. In this Report, we discuss these four proposals in turn. They relate to the treatment of cross-border sales of goods; the flexibility of individual EU countries to vary their domestic VAT rates; special schemes for small businesses to ease the burden of collecting VAT; and cooperation between the Union’s national tax authorities to combat fraud. We have also focused on the implications of Brexit for the UK’s domestic VAT regime, and the consequences for UK-EU trade
Concrete legislative proposals to give effect to this new approach were introduced by the Commission between December 2016 and January 2018 (with technical proposals to follow later this year), including:
- a single VAT area with a ‘definitive’ system for value added tax, which would establish where the taxable event occurs and who is responsible for paying it to the relevant tax authority;
- a proposal on VAT rates, granting individual Member States more flexibility in setting domestic rates given that the ‘origin’ principle has been abandoned;
- a proposal on the VAT obligations of smaller businesses, to improve the scheme which exempts them from the need to charge VAT and certain other administrative requirements; and
- a proposal to strengthen statutory cooperation between the EU’s national tax authorities to combat VAT fraud.
We have set out the substance and implications of each of these proposals in more detail in the chapters of this Report. While the content of the Commission proposals is undoubtedly important, it has been extremely difficult to effectively scrutinise the documents with respect to their potential impact in the UK. In the immediate period after Brexit, the Government’s ‘implementation period’, the UK would stay bound by EU VAT law and therefore part of the Single EU VAT Area. The Treasury has been unable to provide any detail about its desired VAT arrangements for cross-border trade between the UK and the EU after that.
