EU shoots Brexit’s VAT fox

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The VAT rules and rates can be changed at an EU level, which undermines one of the arguments for leaving the EU, as Richard Asquith explains.

False argument

Do you remember one of the rallying calls for Brexit at the 2016 EU referendum concerned the freedom to set VAT rates? The Leave campaign stirred indignation at how the UK could not cut VAT rates on products such as household fuel, feminine hygiene products or e-books. The UK had surrendered the right to offer VAT subsidies on many worthy social and educational causes to unelected bureaucrats in Brussels.

Well, the EU has now beaten the UK to the accolade. In October, EU Finance Ministers agreed to allow states to cut VAT rates on e-books and journals, which adds to new EU-agreed freedoms from 2021 to set reduced or nil VAT rates on most products. Allowing for a likely Brexit transition period of two years, that means all EU countries would gain sovereignty over their VAT rate setting at the same time or before the UK leaves the EU.

Harmonised VAT too wholesome to stomach

Currently under the EU VAT Directive, which member states are required to adopt, countries may only have one standard VAT rate, plus a maximum of two reduced VAT rates, the lowest of which must be 5% or above. States may also have a zero-rate. These reduced rates may only be applied to a prescribed, limited range of goods and services. These are listed in Annex III of the EU VAT Directive and include over 75 rates across the trade bloc. There are some variations to this regime, with a few early-joiner states having rates below 5%.

The rationale for such prescriptive rules and lack of local fiscal freedoms is to ensure countries do not distort the operation of the Single Market by giving uncompetitive tax subsidies to their national providers.

However, these rules have resulted in over 240 exceptions and many seemingly unfair anomalies. This includes the seemingly perverse rule on charging the standard, higher VAT rate on e-books compared to their subsidised printed version. Also, most EU countries must charge full VAT on children’s clothing, while states which joined over fifteen years ago, such as the UK, secured zero-rating.

New reduced VAT freedoms

Under the new EU rules, scheduled for 2021, EU states will have the flexibility to apply reduced VAT rates on any products and services. There will be some broad rules to keep it manageable for businesses providing taxable supplies, including only four VAT rates in each state:

  • One standard VAT rate
  • Two rates between the standard rate and 5%
  • One rate between the reduced rates and 0%
  • One rate of 0%.

There will be some prohibited supplies which must be charged at the standard rate, including alcohol, gambling, tobacco, petrol and diesel, weapons, and some household appliances.

Freedom means pleading and complexity

While campaigners for local tax subsidiarity and rate setting may welcome the EU agreement, they should be wary about what comes next. The pressures from the innumerable worthy pressure groups on state governments will become loud, and governments will come under heavy pressure from popularist campaigns.

The freedoms will also create huge complexity for businesses trading across the Single Market. They will have to track a ballooning number of VAT rates – already 75 under the current system – and national product and service variations. This will demand heavy investment in tax advice and accounting system upgrades. Or, instead, prove enough of an incentive to stop trading in other states, undermining the whole single market objective of harmonised VAT.

It may be that the EU states and Brexit campaigners alike will soon be longing for the days they could blame Brussels for its unfair VAT system.

About Richard Asquith

Richard Asquith

Richard Asquith is the VP of Global Indirect Tax at Avalara, a global transaction tax technology company. He leads Avalara’s outsourced international VAT compliance service. Richard originally qualified at KPMG in the UK, and then spent over ten years with EY in Hungary, Russia and France.

Replies

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06th Nov 2018 14:59

I don't think freedom to set VAT rates was a major boost to the Brexit campaign even with the national humiliation of Davis Cameron wandering the corridors of Berlin to get permission to lower the VAT on tampons.
Once Brexit is complete the UK can abolish VAT and replace it with a purchase tax.

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to Knight Rider
06th Nov 2018 17:23

Knight Rider wrote:

>
Once Brexit is complete the UK can abolish VAT and replace it with a purchase tax.

Yeesh.

We could also bulldoze the whole country and rebuild a close facsimile just for kicks. Count me out of that one!

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to ireallyshouldknowthisbut
07th Nov 2018 14:17

Just wondering how this response contributes to useful debate?

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07th Nov 2018 10:04

Great article, Richard, and you're quite right VAT will become an irk once we leave.

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07th Nov 2018 10:18

Hello Richard
It looks like your pro-Eu prejudice is showing. Why will the freedom to set our own rates and rules be a disadvantage to UK consumers and business?
It is sensible of EU to slacken its rules in some areas but, inevitably, they are tightening the rules in other areas.
We may choose to stick with VAT or return to a Purchase Tax

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to Donald MacKenzie
07th Nov 2018 15:22

The likelihood of the UK abolishing VAT and returning to a purchase tax system is almost nil. VAT is too big an earner and the amount of upheaval for businesses (on top of the massive upheaval of leaving the Single Market and the Customs Union) would be immense. The Govt is already heavily invested in Making Tax Digital for VAT, to be introduced in April 2019, and has already committed to keeping the UK VAT system largely as it is post Brexit. There is quite enough to do already and an under-resourced HMRC is struggling to keep pace. Richard is right that there will however be lobbying from many sides for changes in rate.

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07th Nov 2018 10:18

Yes . . . . . Europeans (in particular the Germans) seem to have changed their minds on a number of things - not least of which is uncontrolled immigration. If only they had listened! If only they had thrown David Cameron a little bone! But they didn't . . . . now it is too late. We should, at least, be thankful that we are allowed to set our own Budget and not have it dictated to us by unelected officials unlike poor old Italy (who are only trying to implement manifesto promises - which is surely the most democratic of approaches). Bye-bye E.U. and bye-bye Angela.

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07th Nov 2018 10:43

Good article, and also liking the fox photo

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By mumpin
to adrianstone
07th Nov 2018 13:59

That's Liam Fox.

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By SXGuy
07th Nov 2018 10:49

No one voted for brexit because of EU vat rates. It may have been an argument but no one used that as a basis for their decision.

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07th Nov 2018 11:30

What utter tripe!

Heath introduced VAT as a "Replacement" for Purchase Tax: which was ONLY EVER levied on new goods; not used goods and NEVER on labour!

VAT is thus a tax on work!

What Heath failed to tell the voters and businesses, was VAT was an EC-Imposed tax; not a nice option.

"One Low Rate! One Simple tax!" crowed Heath. Since when VAT has become one of the most complex areas. Let's remember, VAT commenced at 10%...

Let us also remember, a portion of VAT collected goes direct to the EU's coffers.

Plus, there is the additional duty, of completing the bottom half of a VAT100, which is purely statistical for Eurostat: not e.g. ONS.

If Britain LEFT the now rapidly collapsing EU, then there would be no reason or need to continue with VAT: All apart, of course, from the increasing need to feed Government's addiction to profligacy!

However, the tax (A new Sales Tax a la the USA), could be far less complex and arcane: and far lower.

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to Michael C Feltham
07th Nov 2018 11:50

We are just launching an online coaching business and potentially subject to VAT MOSS. Ican tell you right now that major US companies appear ignorant (ignoring?) of their obligations while delivering a largely digital media product (subject to tax) with a (undefined) element of live intervention makes it exempt; simple?

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By johnt27
to moneymanager
07th Nov 2018 13:16

If you think VAT MOSS is complicated try selling digital services in the USA. A new federal ruling, following a tax case over there, is now introducing state level digital (GST equivalent) taxes - all different rates, all taxing different products in different ways and all with differing turnover thresholds.

VAT MOSS is an absolute doddle in comparison!

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07th Nov 2018 11:50

Not sure why the author seems to think this is a bad thing. EU giving with one hand while taking with the other.

EU is currently planning on removing the veto on taxation from member states and make it majority voting (where they allow a vote at all). This is a much bigger issue than small changes to VAT rates.

Glad we're getting out.

And no one would stop trading in another state just because of a change in VAT rates in that other state- it's not that hard to find out a VAT rate on a product and once you have done it once you're done. The article makes it sound like the VAT rate for your products would be continually changing, when in reality it might change once, possibly in several countries.

Not hard to deal with if you have a half decent accounts department for a larger firm dealing with thousands of products and easy to deal with for a small supplier.

Another Remoaner article busted.

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07th Nov 2018 12:48

The Brexit spin on the story is unnecessary and brings about kneejerk responses.

Cross border business becomes easier when the VAT principles are the same - things like what counts as Exempt, Place of Supply rules for services, triangulation. That's Harmonisation.

Rules about rates act to limit the extent to which countries compete on tax rates.

The downside of both of these principles is that they constrain national sovereignty in setting actual tax rates.

There will be differing views as to whether the benefits are worth the costs. I think they are, and colleagues in Norway certainly feel the frustration of having a non-EU VAT regime. Others may have a different perspective.

As for reintroducing Purchase Tax. I don't think so. USA is the only OECD country not to have a VAT/GST system. VAT is relatively low cost to collect and is relatively difficult to evade. I doubt the Treasury would be willing to countenance a wholesale change to such an important tax

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to paul.benny
07th Nov 2018 12:57

To some extent you're right, however there is no reason why there has to be any VAT or anything restricted about trade with our EU partners or any other country that wants to partake in an international agreement. I believe some years ago someone suggested a currency called the Ecu, purely for trade.

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to johnjenkins
07th Nov 2018 16:46

John: The ECU (European Currency Unit) was an artificial and theoretical Unit of Value and an example of what are called "Currency Cocktails".

As with LIBOR, it was used as a benchmark of value in complex European cross-border financial agreements: as were SDRs (Special Drawing Rights of the IMF used to denominate value in international contracts. These were used to try and damp down Currency Risk Exposure.

ECU's precursors were Snake I and Snake II (Super Snake).

These were all aimed at stabilising European Monetary values, and resulted in the disaster of the EMS (European Monetary System): all the foregoing were the forerunners to the Euro Mechanism and part of EMU (Economic and Monetary Union). Which was part of the fantasies of the founders of a United Europe such as Jean Monnet et al.

Naturally, all this was enshrined in the Treaty of Rome, 1957, which led to the E.E.C. And yet another serious facet Heath sort of forgot to tell the voters and citizens of the UK about!

Surreally, many years ago, I had a client on PAYE, who was perhaps the top European trader in ECUs, in the City, who had serious tax and NIC problems! Mainly since he was constantly being headhunted by banks and market players and repeatedly paid huge "Golden Hellos" (Signing on bonuses), vast sums in salary and commission bonuses and perqs and started work at his desk at latest 7.00 AM having commuted in from Essex: arriving home in time to bolt some food and go to bed... He frequently went in at weekends, middle of the night and Christmas. His first marriage didn't make it: surprise!

Last I heard, he was living in a huge old Manor House standing in hundreds of acres of parkland.

https://en.wikipedia.org/wiki/European_Currency_Unit

https://en.wikipedia.org/wiki/European_Monetary_System

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to paul.benny
07th Nov 2018 14:21

Judging by what regularly hits the courts the suggestion that VAT is not evaded is specious.

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to listerramjet
07th Nov 2018 16:58

With respect, I didn't say that VAT is not evaded. I said is it relatively difficult to evade.

There will always be those who evade a tax or whose interpretation of the rules differs from that of HMRC. Because VAT is levied on more or less every sale and purchase, it is much harder to manipulate a transaction to take it out of VAT.

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to paul.benny
08th Nov 2018 12:53

With respect I think that is wrong. There is plenty of VAT fraud opportunity, as evidenced by the regular flow of cases. It is perhaps a simple tax made complex, but the jury is out on that one!

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07th Nov 2018 14:12

It just seems a bit pointless to be raising questions about the decision to leave the EU. It’s a decision that has already been made. Time to move on.

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