With the government committed to leaving the European Union following June’s Brexit result, there could be profound implications for the UK’s tax regulations. One such matter lies with VAT and how the country will move away from the current EU model.
Business owners need not panic, however. Under the terms of the Lisbon Treaty, the UK will have at least two years to negotiate its exit after Article 50 has been invoked. With this planned for March 2017, there’s plenty of time to consider the potential impact of Brexit on VAT.
Current VAT System
Under the current jurisdiction, the 28 EU member states must operate VAT calculations in accordance with Directive 2006/112/EC. The purpose of this directive is to harmonise tax payments and provide a common invoice framework, although individual governments have some leeway for their own VAT rates.
For the UK, the standard rate for taxable goods and services is currently set at 20%. We also set a reduced rate of 5% for such items as children’s car seats, energy saving materials and mobility aids. Other goods that are granted a 0% or exempt status include charitable donations and educational courses.
Businesses must register for VAT if their taxable income exceeds £83,000 per annum – this is the same threshold for bringing goods into the UK from the EU. You can also volunteer for VAT registration if your business turnover is below £83,000 if this suits your personal circumstances.
It’s difficult to say for certain what will happen to tax rules post-Brexit, not least because the negotiation process can’t begin yet. However, it’s unlikely that drastic changes will be made to VAT because the current system provides a significant source of income for the government.
Around £100bn – around 22% of the total tax income for 2015/16 – was made up from VAT payments last year. Furthermore, the VAT system will act as a vital condition for access into the single market, even if the UK leaves.
One thing we do know is that the UK will not be subjected to Brussels-led bureaucracy any longer. For example, back in 2012, the EU overruled UK policy on the issue of energy-saving materials where the reduced 5% rate would only be granted to specific social groups as opposed to typical residential properties.
By leaving the EU, domestic homeowners can still purchase equipment such as solar panels without 20% being added on top, a positive sign for green activists and the energy saving industry.
By remaining in the single market, the UK will be allowed to zero-rate their supplies to other EU countries if they’re also VAT-registered, and vice-versa. But even leaving the single market may not be too detrimental as UK goods and services will still remain in demand – this is further compounded because VAT stability across the continent also suits EU countries.
Under a ‘hard Brexit’, domestic companies dealing with the EU may face further tax complications and export regulations to sift through. For sellers to Europe, it is wise to seek the advice of an accountancy firm who can guide you through the possible new regulations and how to adapt efficiently.
If you’re worried about how Brexit may affect your company, please get in touch for a chat today.
If you have multiple businesses, you may be interested in how to work out your taxes for those businesses.