Brexit is no longer just a catchy phrase. The United Kingdom has voted to withdraw from the European Union. In a nation-wide referendum of June 23, 2016, which saw near-record turnout, the “Leave” campaign won 52% of the public vote, compared to 48% for “Remain.” This historic decision has had immediate ramifications: one day after the vote, the value of the pound sterling fell to a 30-year low; British Prime Minister David Cameron – a “Remain” supporter – announced his resignation; and top political leaders in Scotland and Northern Ireland signaled that they might hold new independence referendums to break away from the UK. The UK will now have at least two years to negotiate a withdrawal agreement with the European Council pursuant to Article 50 of the Lisbon Treaty. The agreement period will toll once the UK officially notifies the Council of its intention. Once an agreement is reached, the UK will no longer be bound by the terms of the EU VAT Directive, among other provisions of EU law. The UK withdrawal is unprecedented, and leaves the EU in uncharted waters. Reports from Germany indicate that the UK may be offered “associate status” upon withdrawal, but that there would be “no automatic access to the single market.” This is a tentative proposal at best. The final terms of the UK’s relationship with Europe, and the full ramifications for indirect tax in the UK, will likely take years to determine. One thing is for sure, VAT will have to be reconfigured for the United Kingdom and this will cause even more complexity.
One Example: “Brexit” Advocates Claimed British Households Could Save £1.7bn in VAT Costs
Prior to the June 23 referendum on EU membership, top figures in Britain’s “Leave” campaign claimed that leaving the EU would allow the government to eliminate VAT on domestic fuel, which they alleged would save British households nearly £1.7bn per year. Although Britain has zero-rated fuel in the past, a 5% VAT rate has been in force since 1994, and the zero rate could not be reintroduced under EU rules. According to the Treasury, the cost of VAT on fuel to the average British household is roughly £67 per year. George Osborne, the Chancellor of the Exchequer and a prominent voice in the “Remain” campaign, countered that leaving the EU would lead to a British recession, thus making any tax cuts unfeasible. Here at Sovos, we will continue to monitor this important issue closely and keep you updated concerning how this will impact VAT rates and rules for the United Kingdom and beyond.
