I suspect that most of us are still in a state of shock after the Referendum. But while the politicians sort out our political and international future, for most of us, it’s back to business as usual this week. This is probably a good thing. Routine – even doing your VAT return – is one of the best ways of dealing with shock.
But it’s a bit difficult to concentrate with normal VAT stuff when our political situation is in such turmoil. Even the most pro-Leave campaigners would have to admit that they had given NO serious thought to the practical side of leaving the EU, which is why everything just feels like a real British farce at the moment.
So what happens to VAT?
VAT was introduced in 1973 as a condition of the UK joining the “Common Market”, but it won’t be going anywhere, even if we leave the EU. The simple point about VAT is that it is a very successful tax – but what do I mean by that?
VAT revenue
First of all, VAT is the second highest source of revenue for the government, after income tax. Even if the Starbucks, Googles and Amazons of the world can move their profits round to reduce their corporation tax bill, they still have to pay VAT on all of their UK sales, which is a lot of money.
It’s easy to collect
The other important factor is that the tax is easy to collect. VAT is the original “self-assessed” tax. VAT registered businesses collect the tax, do the calculations, submit their returns and payments themselves, so the cost of collection is very low. Apparantly it costs something like 10p to collect every £1 of income/company tax, while the cost of collecting VAT is about 1p for every £1. That’s because the businesses do the work.
So what could happen?
Of course, for the time being, it’s business as usual and we continue to follow the existing rules. But what happens next depends on our relationship with the EU after we leave. And there’s a lot of “what if’s?”
There’s a lot of talk about the UK negotiating to remain in the “Single Market”, i.e. a free trade/movement of people arrangement, in which case our VAT system would almost certainly remain as is; following the EU VAT rules. This would, presumably, include the ability to refer VAT issues to the European Court of Justice. It would also mean that the EC could bring about infraction proceedings against the UK if if the UK’s application of the tax doesn’t follow the EC rules.
However what if we leave entirely? If our policiticians are unable to negotiate membership of the Single Market, then the UK VAT system would be dictated entirely by Parliament. This means that we’ve have no recourse to the ECJ and that the government would be free to change the VAT rules and HMRC would find it much easier to apply its’ own interpretation of the rules.
This could be a good thing in some respects. For example, under EC rules, we can’t extend the scope of the zero-rate or exemption beyond that laid out in the VAT Directive. However, it also means that the government would change the UK rules to enable HMRC administer VAT much more strictly.
Whatever happens, I expect our politicians to get their act together and get a plan in place. We all want to know what’s happening and when so that we can plan properly for the future and get back to some semblence of normality.
Next week, I promise, no more referendum and back to day to day VAT stuff….
Marie
26 June 2016