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May’s historic Brexit loss – what now for VAT?

It is not a good Wednesday morning in 2019 for Theresa May. On Tuesday night May suffered an historic defeat (the largest Commons defeat in political history) when her Brexit deal received a vote of no confidence (and Mrs May might follow suit shortly if the opposition party has its way). This plunges Britain and its plans to leave the EU into further disarray and creates even more uncertainty around VAT implications.

After the vote, there are 3 possible scenarios that could play out:

  • No Deal and the long-awaited divorce happens on the 29th March.
  • Article 50 is extended and Brexit is delayed or called off completely which for many speculators is the most likely scenario*.
  • The slight chance that a better deal is negotiated which is highly unlikely.

*This may be preceded by a Second referendum or so-called “People’s Vote”.

If Corbyn’s call for a vote of no confidence in the PM is successful, what would inevitably follow is a general election. However, regardless of the outcome of the election, it appears that neither Corbyn not any potential Torie successor has a better deal to take back to Brussels. As May put it so eloquently yesterday after the vote, “It is clear that the House does not support this deal… But it tells us nothing about what it does support”.

This means that in this scenario, we are in the same (sinking) boat and therefore the choice is still between Hard Brexit or No Brexit.

A delay of Brexit would provide no certainty in terms of VAT, only a less hectic deadline for businesses to adapt. Obviously if Brexit is delayed all VAT rules and regulations stay the same in the interim but eventually some kind of deal will need to be reached. For many, this means the UK remaining bound to the EU VAT directive regardless of what may be agreed in terms of the single customs market. In this scenario, the VAT implications would be simpler.

Option 1 (the ‘No Deal’ scenario) would be catastrophic for VAT. In this doomsday case, the UK leaves the customs union and single market and no longer adopts the European VAT directive meaning absolute chaos for VAT. Import VAT would have to be paid on all shipments not subject to any newly implemented deferment. There would be difficulty moving goods around Europe to UK and vice versa (due to increased administration and border checks), UK businesses might need VAT registrations in several EU countries or will possibly have to start new legal entities.

Most significantly, for UK businesses, 8th Directive would become the 13th Directive for cross border vat refunds between UK and EU.

Regardless of who is in the hot seat, the same options for Brexit face them. And while the pound recovered nicely after the vote, UK businesses still await real direction that will determine the fate of their VAT and compliance. Until then, there can be no peace of mind for any Financial Director across Britain. With potentially less than 75 days until this divorce pushes us off the Brexit cliff, it is imperative that business plans for the worst case scenario and have contingency plans in place to ensure at least some semblance of business as usual.

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