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Daily Tax Report: International

INSIGHT: VAT After Brexit

Nov. 15, 2019, 8:01 AM

During the final stages of last month’s chaotic scramble for a Brexit withdrawal deal, it was widely reported (mainly via tweets from incredulous political correspondents) that the sole remaining impediment to an agreement was the nature of arrangements for value-added tax (VAT) in Northern Ireland.

Indeed, to most people it would have been surprising that VAT was holding up the sealing of what, on the face of it, was a pretty remarkable deal. Just a week earlier, following a horribly awkward conference call with Angela Merkel, Boris Johnson’s chances of getting an agreement were pretty much written off (including, it appeared, by some in Downing Street).

Why, then, risk this spectacular turnaround over the fine details of a consumption tax? Johnson had repeatedly talked about the possibility of the U.K. not leaving the EU on October 31, 2019, as a potential “extinction event” for the Conservative Party. “Kick the can,” he declared, “and we kick the bucket.” Why risk annihilation for the sake of VAT?

As we know, Johnson got his deal. VAT in Northern Ireland had indeed been a blocker; but so had customs issues in general. In true Alexander-like style, Johnson untangled the Gordian knot of tax and customs regulations at the Irish border by—at least according to his onetime allies in the Democratic Unionist Party—chopping right through it, leaving Northern Ireland with a significantly different customs and revenue regime to the rest of the U.K. As part of the Johnson deal, VAT on goods in Northern Ireland would be treated according to EU rules—not those of the U.K.

Of course, as it turned out, any relief generated by the new withdrawal agreement was short-lived. Johnson declined to allow Parliament as much time as it would have liked to inspect the deal—and to perhaps change some of its fundamental aspects through so-called “wrecking” amendments: the Johnson regime’s particular fear was that Parliament would attempt to include the whole of the U.K. in the EU’s Customs Union.

With no-deal off the table, and Johnson certain to break his oath not to delay Brexit any further, the Labour Party consented to give the Prime Minister the general election he desired. It will take place on December 12, 2019.

For many Brexiteers, particularly those associated with the European Research Group (ERG), breaking away from the EU’s regulatory regime is the true purpose of Brexit.

It may have been expedient to harness concerns about immigration and the free movement of people in the EU during the referendum campaign, but limiting immigration is by no means a first order priority for committed global free-traders. On the contrary: the free movement of capital and labor is essential for the free-market “Global Britain” project: what Brexiteers dislike is what they see as the incoherent hypocrisy of the European project: notionally economically liberal within, but ferociously protectionist externally. Hence the extreme antipathy to the idea of remaining in the Customs Union.

Brexiteers believe that the U.K.’s trade with the world outside the EU will soon (according to their estimates by about 2030) outstrip trade with the EU, and that the gigantic and rapidly growing economies of—for instance—China and India will be far more important than a complacent, sclerotic Europe to U.K. prosperity during the 21st century.

For Brexiteers, the EU’s high tax, high public spending “social model” makes it uncompetitive now and would cause huge missed opportunities in the future. It therefore makes no sense to Brexiteers to continue be bound by the EU’s regulations: its tariffs, its taxes, its onerous product standards. The U.K. would be fastened to a dying animal.

Centralization and Divergence

VAT is the EU’s defining tax (you can’t join the EU without it), and were they to examine the European Commission’s current plans for VAT in the EU, Brexiteers might well feel an uneasy combination of vindication and regret about where regulation is heading.

The centralizing, harmonizing instinct that Brexiteers have long feared and railed against is still strong in Brussels. Under the banner of an anti-VAT fraud agenda, the Commission has pressed for huge structural reform of cross-border VAT procedures.

The proposed changes would see unprecedented levels of practical cooperation between member state tax authorities; indeed, beyond the mere sharing of information, member states would be directly collecting billions of euros of VAT revenue on each other’s behalf.

In January 2021, a mini-one-stop-shop (MOSS) for E-Commerce VAT is due to come into effect; rather than manage registrations in multiple jurisdictions, companies will be able to make filings through a portal in their home territory to all the different member states in which they sell directly to cross-border consumers.

The object of the MOSS (itself an expansion of a previous framework for purely digital services) is to allow cross-border VAT collection to keep pace with the development of the online economy. It will also double up as a testing ground for the larger one-stop-shop (OSS). The OSS, targeted for implementation in 2022, is intended to apply a similar framework to the management of VAT on all cross-border goods transactions in the EU; it dwarfs the MOSS financially and in its complexity, and implies massive coordination between European tax authorities.

These are the core elements of the plan, but the Commission is rolling out other reforms even sooner than these. Four “quick fixes” to the EU’s VAT system are due to be adopted by all EU member states in January 2020:

  • harmonization of the VAT treatment of chain transactions of goods in the EU;
  • tightening of the requirements for zero-rated intra-EU supplies of goods;
  • harmonization of the simplification for cross-border call-off stock in the EU;
  • standardization of documentary proof of transport for intra-EU supplies of goods.

VAT’s direction of travel is not exclusively towards the center—greater flexibility of individual member state VAT rate setting is in the pipeline; and some member states are also now demanding separate non-standard electronic VAT reporting from businesses—but the overall sense is of the Commission trying to take a grip on Europe’s VAT organization.

There has been some skepticism about whether these enormous changes can be delivered in the declared time frames (like Brexit, EU VAT reform has a track record of being allergic to deadlines); the OSS, in particular is highly unlikely to be implemented in anything like its current form or close to its current target date. Indeed, with a new EU tax commissioner, Paolo Gentiloni, taking the reins, there are suspicions that the OSS approach to rationalizing EU VAT may be quietly dropped in 2020. Nevertheless, the schedule speaks to the Commission’s historic commitment to optimizing the single market from a tax perspective, even if this should be at the expense of some member state sovereignty.

This aspiration has not died. Writing to Signor Gentiloni to confirm his appointment, the incoming President of the European Commission, Ursula von der Leyen, was explicit that the unanimity principle in EU tax decision making is under threat: “to ensure we make the progress we need, we should make full use of the clauses in the Treaties that allow proposals on taxation to be adopted by co-decision and qualified majority voting.”

A VAT-free U.K.?

Though Brexiteers might feel some grudging admiration for the Commission’s commitment to giving businesses the freest possible hand within the EU, their primary reaction to these developments would probably be relief at the thought they can evade such centralized VAT control.

We know for certain that Brexiteers feel deeply uncomfortable about VAT: Michael Gove made it a central part of his recent Conservative Party leadership campaign that VAT would be abolished after Brexit, and be replaced with a “simpler” sales tax.

Gove was targeting the perception that VAT is complex and unwieldy; exactly the kind of bossy and fussy European procedure that should be the U.K.’s own business, with taxation generally being an area of which the U.K. ought to “take back control.” It won’t have escaped Gove’s attention that abolishing VAT would also make it enormously harder to rejoin the EU at a later date, as the U.K. would have to readopt the system to qualify for membership.

What’s more, the plan would have pleased the true object of the Brexiteers’ trade deal desires: Donald Trump’s United States. The U.S. is the only major economy not to employ a VAT-type indirect tax system and Trump has repeatedly attacked the EU (German car manufacturers in particular) for gaining an unfair advantage over the U.S. because of VAT. (It should be pointed out that Trump does not appear to understand how VAT works).

As with Brexit itself, Gove’s proposal was widely criticized for failing to consider the costs alongside the benefits of such a huge change. VAT generated in excess of 130 billion pounds ($166 billion) for the U.K. exchequer last year; the number grows annually; its whole point is that, though relatively complex, it is highly effective as a means of revenue collection.

Brexit or no Brexit, VAT will almost certainly remain in the U.K., irrespective of the election result. This, despite its being disliked by both main parties: Labour, because it is regressive, the same rate being paid by the many and the few, and the Conservatives because it will be a functioning reminder of the U.K.’s recent past, a potential trapdoor back to the EU.

Nicholas Hallam is Chairman of Accordance, U.K.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.