The impact of Brexit on indirect tax

Following the vote to leave the EU it is clear that the exit will require a fundamental review of how VAT and Customs Duty will operate going forward. Amidst all this uncertainty it is clear that all Northern Irish businesses that are registered for VAT in the UK and all Northern Irish businesses which supply services or move goods from and to the EU will be affected by the change.

VAT

In the event that the UK decides to retain a system that mirrors the existing EU VAT system, it is possible very little may change. VAT will still be chargeable on supplies of goods or services which take place in the UK and there will be exemptions (zero – rating) for cross-border supplies.

The UK is currently bound by EU VAT law and in its implementation has been required to recognise its general principles such as the principles of proportionality, fiscal neutrality, abuse of rights and legitimate expectation. It is arguable that, in light of an exit from the EU, the UK will no longer be required to adhere to these principles of EU law. 

Future Chancellors would have an opportunity to impose his/her own will on the UK’s VAT system and could, amongst other things, set different rates and change which goods or services are subject to the zero rate.   

Customs

Initially, it is unlikely that very much will change in terms of formalities relating to the movement of goods between the UK and other EU member countries. However, post Brexit, it is more likely that the UK will be outside the customs union of the EU. 

In that event, we will see the reintroduction of customs controls which will have both a time and cost implication for businesses. This could potentially have a significant impact on Northern Ireland as it is the only part of the UK with a land border with the EU.

Membership of the EU brings the additional benefit of access to a significant number of countries through bilateral free trade agreements (FTA’s). The UK may need to negotiate its own FTA’s and the time and resources to achieve such agreements will be significant, and dependent on willingness of other countries to negotiate. In the interim, and in the absence of any FTA, third country trading partners would have no choice but to raise the tariffs on UK goods.

Currently, UK and EU standards are aligned, meaning that it is not possible for the countries within the EU to raise non-tariff barriers between one another. However, once the UK is outside the EU, member states would not be prevented from increasing non-tariff barriers to UK goods. Should the UK opt to introduce different standards, there are also likely to be implications for businesses as goods would need to meet both UK standards for domestic sales and EU standards for sales in EU member states.

Preparing for and dealing with an eventual Brexit starts now. Northern Irish businesses affected by Brexit will want to understand what the likely impact of any VAT and Customs Duty changes will be on their respective business models, supply chains and profitability.