Countdown to Brexit: 91 days – VAT threshold may be lowered under the Withdrawal Agreement

The Parliamentary Committee scrutinising the terms of Brexit have warned that if the ‘deal’ is accepted and comes into force on 29 March, thousands more small businesses in the UK come into the VAT scheme – and have to charge, account for and re-pay VAT.  A EU directive - scheduled to come into effect next year - will be reduce the VAT thresholds across Europe in order to “harmonise” tax regulations.

Small firms in the UK do not have to charge VAT on goods and services if their annual turnover is less than £85,000.  

MPs on the ‘EU Scrutiny Committee” have warned that Britain – under the terms of the Withdrawal Agreement - will have to implement the EU directive reducing the threshold to €85,0000 (£76,700).  They note that the UK will not be able to veto the plans once we exit the EU in March under the terms of the ‘deal’.

Throughout any Brexit transition period – presently proposed to run to the end of 2020 - Britain is required to accept and implement EU directives.  The report from the Committee says: “If the Agreement is ratified and the Directive took effect during the transition, the Treasury would have to transpose it into UK law.  This could have significant implications for small businesses.

Extracts from EU Scrutiny Committee – ‘VAT: exemptions for small businesses’

"It is particularly concerning in this regard that the UK will lose its veto over the proposal on 29 March next year - but it could nevertheless apply here in full."

They also note that: “the above concerns do not arise in a ‘no deal’ scenario, where the Withdrawal Agreement—and therefore the transitional period and the Irish backstop—are not ratified.  In such a scenario, the UK would be free to amend or repeal elements of its VAT law as of 30 March 2019 (for example to zero-rate women’s sanitary products).”

“However, without a Withdrawal Agreement, UK exports would face the immediate re-imposition of VAT controls on goods destined for the EU.  Similarly, UK-registered businesses will immediately cease to be covered by the various simplifications to account for VAT on trade with the EU, such as the application of the ‘country of origin’ principle for cross-border sales below a certain value.”

In any event: “These changes would also automatically occur at the end of any transitional period, barring a new agreement on VAT having already been reached with the EU by that point.  To minimise the disruption resulting from the UK’s exit from the common VAT area, the Treasury will therefore at some stage have to engage in negotiations with the EU on matters of Value Added Tax - whether as soon as possible in a ‘no deal’ scenario, or during any transitional period under the Withdrawal Agreement”.

Reactions to the Report

Brexiteers responded with fury to the report, claiming that it highlights "the danger" of The Prime Minister’s Withdrawal Agreement on the British economy.  MP Marcus Fysh – a member of the EU Scrutiny Committee says: "It is an example of how the transition in the Withdrawal Agreement could have dangerous implications for domestic business in the UK, with us still being forced to follow EU rules.  Should it be extended we could be exposed to all sorts of other anticompetitive regulation coming down the line that we could do nothing about."

People’s Vote campaigner, Chris Leslie, suggests that the deal will essentially turn the UK into a ‘vassal state’:  "This is another thing that none of us could possibly have known about back in 2016.  Whatever way you voted then you weren't voting for more taxes and bureaucracy on small business and the self-employed.”

Mike Cherry, Chair of the Federation of Small Businesses: "VAT is the hardest, most time-consuming tax for small businesses to administer, typically taking more than a working week a year.  Dragging more small firms into this bureaucratic regime would take hard-working entrepreneurs away from running and growing their businesses."


Published on 24 December 2018

John ShuttleworthComment