The Principal VAT Directive (PVD) consolidates the legislation governing value added taxation in the EU. It safeguards the smooth operation of the single market and equal treatment for all businesses trading across the EU, and lays down rules ensuring a consistent approach about how much VAT to charge, when it should be declared, and to which tax jurisdiction it should be paid.
This “free trade” arrangement that exists within the EU is attractive not only to businesses within the EU, but also to foreign investors who take advantage of the UK’s gateway to the European market.
Should the UK relinquish its EU membership, whilst an equivalent to VAT might be legislated for, it would not be VAT as the rest of our EU trading partners know it; the EU rules on cross-border transactions for example, would not apply.
UK businesses trading with the EU could therefore suddenly find themselves at a commercial disadvantage, with many having to charge a UK VAT equivalent, or even register for VAT in the EU country where they do business.
Similarly, EU firms which had previously been able to trade freely with UK suppliers would face commercial barriers to trade, either charging VAT as administered in their own member state, or having to register for the UK’s VAT equivalent.
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A removal from the VAT Directive would result in our EU exports of goods and services being £40bn more expensive for our customers, with EU imported goods and services being £55bn more expensive for us; and that excludes any additional import duty tariffs.
And let’s not forget the numerous VAT exclusions we benefit from as a partner in the PVD, ensuring that health, welfare, insurance and financial products are exempt from VAT. Outside the European VAT model, there’d be nothing to prevent a future UK government imposing VAT on these supplies.
While there’s no suggestion that additional VAT charges and administration could not be overcome, should the UK exit the existing EU-wide arrangement, additional VAT and duty charges and administration could result in the UK being ‘cut off’ from the continent.
David Wilson is an associate director at Baker Tilly.