Brexit Breakfast edition
By Graham Elliott
Whether you love or loathe Brexit, it is going to be part of your diet for the next two or three years, so I thought I ought to let you have my thoughts on potential consequences. Of course, you may have read pre-briefings, and a plethora of other materials in the wake of the actual result of the referendum, so my intention is not to provide a complete guide. This is intended, instead, as my comments on how I see it panning out.
Business as usual?
Once we have left the EU it appears very unlikely that it will simply be ‘business as usual’ in terms of the VAT rules. In particular, the campaigners for Brexit dropped the idea of seeking to re-enter the single market by means of a negotiation, because of the need, therefore, to accept the primacy of EU VAT legislation, and even free movement of people. So there is no reason to think that we will still be able to trade in goods, across the EU border, in the same manner that we have got used to since 1993.
To the extent that British businesses have branches in EU states, or move goods from one part of the EU to another, these rules will still apply in those cases. In essence, therefore, many British based companies will need to apply a mixture of the rules related to ‘third countries’, and to Single Market trade.
Mini One-Stop Shop
The much derided Mini One-Stop Shop (or ‘MOSS’) will continue to be relevant for businesses offering electronic services to consumers in the EU. We do not escape the obligation to register for such supplies, and this must be done either in every single member state into which the supplies are made, or via the MOSS. Our suppliers will, however, have to choose a member state in which to register. An obvious choice is Ireland, but need not be. I imagine that the long-awaited introduction of a minimum supply threshold for this regime, championed vigourously by the UK, will now be dumped by the rest of the EU.
The minimum allowed standard rate of 15% will no longer apply, and the UK will be free to set its own standard rate. The minimum reduced rate of 5% will no longer apply, and the UK will have complete control over that rate.
In fact, the UK can introduce other VAT rates, such as a super-reduced rate, or indeed a higher rate (presumably for luxury goods). UKIP’s much-publicised higher rate for luxury handbags, could actually become reality.
We will no longer have any limitation on extending the current zero rates to other goods and services. To date, we have only been able to keep (in aspic) zero rates that were held over from the standstill provisions. This often caused HMRC to refuse minor expansions even where these were intended to do little more than help draw more logical boundary lines. This legal objection will be removed, giving scope for sweeping simplifications to arguably over-complex areas such as the VAT treatment of food.
There will no longer be an obligation on the UK to retain any of the exemptions enshrined in the Principal VAT Directive. Most of these exemptions are aimed at relieving supplies of a social nature from VAT. These are strictly governed by the terms of the Directive. The independent UK will have carte blanche in applying exemptions, modifying them, or doing away with them.
The likelihood is that the financial service exemptions will largely remain intact, since there will be a desire to avoid undue taxation of this sector, particularly in the several years after the UK leaves the EU. Furthermore, these exemptions were introduced owing to difficulty in ascertaining the exact consideration paid for a service. It is therefore likely that the overarching framework of the financial and insurance exemptions will remain similar for many years to come.
Reverting to the social exemptions, it is notable that certain of these were introduced into the European legislation long before they made it into the UK law code, owing to general reluctance on the part of the UK government to honour their commitment to introduce them under EU law. Varying degrees of delay occurred with regard to the following social exemptions:
- Sport and physical recreation
- Cultural services
- Exemption for philosophical, philanthropic, civic and political bodies membership
- The cost sharing exemption
Whereas it might be too extreme to say that these are all therefore at imminent risk, particularly as some of them (such as sport and culture) have become fairly popular, changes may be made to them over the years to deal with certain kinds of anomaly. In particular, there has been a lot of avoidance scheming over the years to seek access to the sporting exemption by organisations which are far from charitable in nature. The use of various techniques, enshrined in EU law, to either switch on or switch off the exemption for cultural services could well be rationalised away by a UK government unfettered by EU legal concerns. There is a distinct likelihood that membership of philanthropic and similar bodies will lose exemption, and the little used, and very unloved, cost sharing exemption seems likely to be dumped at the earliest possible moment.
By contrast, one of the most recent decisions of the Court of Justice of the EU (‘Court of Justice’) that delegated claims handling services for insurance businesses could not be exempted (as the UK does) would in effect be ignored following our departure.
And that leads us on to one of the trickier aspects to predict, namely how our courts will deal with case precedent.
Regular readers of this newsletter, and my other articles, will have become aware of my frequently expressed concern at the poor quality of the decisions of the Court of Justice. One of the most important reasons for drawing attention to this is that it is, in effect, the UK’s true ‘Supreme Court’, since points of legal principle, where there is any uncertainty on the part of the national courts, must be referred to the Court of Justice, the opinions of which are binding throughout the EU.
Indeed, the powers of this Court have been one of the major bones of contention in the referendum. It goes without saying, then, that it will lose all authority, after we leave the EU, in terms of decisions of our own court system. Our own Supreme Court will then become the absolutely final arbiter of all cases relating to VAT.
This is obvious, but the less obvious point is what to do with all of the previous case precedents.
The difficulty is that there is a vast amount of precedent set by the Court of Justice over the years in relation to very many aspects of VAT theory which have been picked up, and incorporated in decisions of our own courts. Of course, that has been because they had no choice, and there have been examples where it was fairly easy to see a certain tension emerging between our court system and the Court of Justice.
Apart from the First-tier Tribunal, all of our tax courts give rise to binding precedent on lower courts. It follows that any decision of, say, the Court of Appeal, is binding on the lower tribunals. But there must be some doubt as to whether that remains the case where the higher court decision was entirely reliant upon a principle drawn from a decision of the Court of Justice. This is the case whether or not there has been a specific change in our VAT legislation following our departure from the EU.
The courts will have to consider how far they decide to follow these principles, for the sake of good order, or whether they allow them to slip. If it appears as though those precedents no longer hold, there will be a vast amount of ‘re-litigation’ of basic principles of VAT in order to backfill a gaping hole in case precedent that would be left.
Just as an example, our entire approach to what is an ‘economic activity’ (aka ‘business’), has been set by decisions of the Court of Justice. The jurisprudence relating to the distinction between composite (single) and multiple supplies equally has been set by the Court of Justice.
It is difficult therefore to map out any kind of coherent approach to these issues.
And, before we actually leave the EU, which cannot occur much earlier than two years from now, our courts are still technically bound by decisions of the Court of Justice. That includes decisions which are made after 23 June 2016. Whilst that is definitely the case in legal terms, it stretches credibility to think that our courts will continue to assume that they are bound by these decisions. The more likely, pragmatic, approach would be for the Supreme Court judges, and others, to come to a practical consideration whereby they treat Court of Justice decisions as being no more than advisory from this point onward. Since there is no precedent (apart from Greenland) of any state leaving the EU, there is no guidance that can be given to our court system as to how to deal with this.
On a personal note, I do believe that one benefit of our departure from the EU will be an improvement in the reasoning of the legal decisions relating to VAT. Whilst it is fair to say that Court of Justice decisions have been gradually improving in recent years (after a precipitous decline just prior to then), they nevertheless fall far short of our courts’ decisions.
Whither (or Wither) VAT?
Is it a possibility, in the long term, that VAT will be abolished in the United Kingdom, and replaced with some kind of simple purchase tax?
I believe that is unlikely. VAT, or goods and services tax, has become very popular around the globe. Something along the lines of VAT would be expected to be retained. It is more likely that the basic system, with its inputs and outputs, of a VAT style tax, will remain for the foreseeable future. However, whether VAT manages to deal with international and increasingly electronic commerce is another matter. VAT has shown itself to be a clunky mechanism when dealing with such things, and is prone to fraud and suppression which can so easily arise in applying its rules. A point in time seems certain to come when all of the jurisdictions that apply a VAT-type tax will have to rethink the position. But until that time comes, it seems unlikely that the UK will break ranks with the rest of the world.