The Future of VAT zero-rates Post-Brexit
Within the EU VAT is a relatively harmonised tax, meaning that member states work to single directive and the domestic application of VAT is subject to oversight by the Court of Justice and to challenge by the EU Commission.
This judicial oversight has caused political and economic problems for the UK government over many years. So how will future Chancellors behave once they are freed from the shackles of the Single Market?
When the UK joined the Common Market in 1973 we had a list of goods and services which had not previously been taxed. Europe agreed, as a transitional measure, that the UK could retain the zero-rates which existed in 1973, but this agreement came at a price. Firstly, the UK have not been permitted to extend the zero-rates and secondly, if we decided that VAT should be imposed, the government was not then permitted to revert to the zero-rate.
The consequences of these restrictions was that the UK zero-rates became stranded in time. Arguments about whether Pringles are crisps (they are!); the discrimination against e-books compared to printed versions and the inability of government to reintroduce zero-rating for energy efficient fuel and power all arise because we are trapped in 1973. In 1973 crisps were made of potatoes; and electronic books were the stuff of science fiction – VAT hasn’t been allowed to keep up with modern life.
So will exit from the Single Market see a plethora of new zero-rates? There were certainly plenty of lobbying from industry sectors and welfare bodies hoping that the Chancellor will use any new found freedom to reduce their particular tax burden.
In reality, and paradoxically, we may see the zero-rates diminish rather than grow after Brexit. Whilst in the EU, it has been a badge of honour for successive UK governments to be seen to stand up against Brussels and insist on retaining the UK’s special VAT rates. In future, this particular political angle will disappear and, faced with the ongoing reality of a large budget deficit and a reluctance to increase direct taxes, there will be continuing pressure on increasing the country’s take from VAT.
If you would like further information or advice on VAT please contact Glyn Edwards, your local MHA MacIntyre Hudson adviser or send an enquiry.