Brexit: Implications for indirect taxation and cross-border trade
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Brexit: Implications for indirect taxation and cross-border trade


The UK’s VAT rules could change after an EU exit, meaning charges for imports and exports between the UK and EU member states. Preferential customs and duty rates in the single market could also end upon leaving the EU Customs Union.

These could potentially increase the cost of doing business between the UK and EU.

VAT has been harmonised in the EU since 1977, but once the UK leaves, it would likely no longer be bound by the VAT Directive and the UK's VAT Act will take supremacy. The government would then be free to change how the indirect tax is charged, or could choose to overhaul the regime altogether.

The UK's ability to potentially set its own tariffs and create the type of goods and services subject to a charge would mean that "UK businesses transacting with suppliers or customers in EU member states are likely to face increased administrative costs if they have to apply different rates", said Adam Craggs, partner and head of the tax dispute resolution team at London law firm Reynolds Porter Chamberlain.

"The UK VAT (or other sales tax) rules will no doubt change over time, perhaps most immediately there may be an extension of the zero rate and in due course a change in the main rate. New rules will no doubt have to be introduced to replace or modify the existing VAT rules which distinguish between supplies made to or from EU member states," Craggs said. "It is likely there will have to be technical changes in relation to, for instance, methods of reclaiming VAT from EU tax authorities (for example, the VAT incurred by businesses in member states of the EU). One issue which is likely to arise is the extent to which existing VAT case law (pre-Brexit) remains applicable in the UK."

For UK businesses, the actual cost of processing imports is expected to increase.

"In terms of the existing intra-EU trading model, 'despatches' to the EU will become exports for UK VAT purposes," KPMG told International Tax Review. "This alone will have no direct VAT cash flow cost but will potentially cause a delay in how quickly goods can be cleared and imported into the destination EU member state. Becoming a non-EU country will also remove access to simplifications, such as triangulation, call-off stock and the less common consignment stock simplification. This may increase the number of required VAT registrations."

Companies in the EU importing goods into the UK "should ensure they classify and evaluate their goods properly and be well-informed with regard to any import restrictions and tariff quotas," Swedish tax advisory firm Skeppsbron Skatt said. "This also means that the administration in the form of inter alia customs and any import tax returns may increase significantly at an exit."

For non-EU businesses, the administrative costs could increase if member states introduce requirements that require them to appoint tax representatives to be liable for any VAT due.

The UK's exit from the EU also means trade between the two would no longer be covered by EU simplification rules that prevent a vendor registering in each member state in which it operates to account for VAT. "More European companies may therefore have to register for VAT in the UK and EU companies already registered for VAT in the UK may have to report VAT on sales that were previously covered by the reverse charge," Skeppsbron Skatt said.

"However, VAT is a big revenue raiser and so it seems unlikely that wholesale changes would emerge in the near to medium term", according to Dechert law firm.

Divergence between EU VAT law and a UK VAT law could persuade the UK government to maintain a VAT system that is aligned with the EU. This would also remove the risk of double taxation.

Continued trading with the EU – and beyond

The UK will have to adopt new trading relationships with the EU and other countries on exiting the EU.

There are several models for trading with the EU that the UK may chose (See Table 1):

  • The Norwegian Model, involving an European Economic Area (EEA) agreement; or

  • The Swiss Model, involving membership of the European Free Trade Association (EFTA); or

  • The Turkish Model, for continued membership of the Customs Union; or

  • The Canadian Model, under which the EU has agreed a Comprehensive Economic and Trade Agreement (CETA); or

  • The World Trade Organization (WTO) rules, that would be the default in the event that the UK fails to reach an alternative trade agreement.

Table 1: Possible post-Brexit arrangements with the European Union




European Economic Area (EEA)

Iceland, Norway and Liechtenstein

  • contributions to the EU budget

  • free movement of goods, capital, services and people

  • outside the EU customs union

  • very limited influence on regulation

  • European Free Trade Association (EFTA)


  • contributions to the EU budget

  • requires trade agreements with individual EU countries and across industry sectors

  • no passporting rights for banks

  • outside the EU customs union

  • very limited influence on regulation

  • Customs union


  • tariff-free access to most of the EU single market, except for financial services

  • adoption of EU external tariffs for non-EU trade

  • very limited influence on regulation

  • Free Trade Agreement

  • mostly tariff-free single market access, but compliance needed with EU standards and product regulations

  • no full access for services and no automatic passporting rights for banks

  • World Trade Organization - most-favoured nation

  • trade with the EU subject to the EU’s common external tariff

  • Source: OECD Economic Policy Paper, April 2016, No. 16

    The Norwegian model

    The EU has said the Norwegian model (an EEA agreement) only works properly if parties adopt these internal market obligations fully, which means the UK would be unlikely to succeed in negotiating any derogations," said Mathew Oliver, partner and corporate tax lawyer at Bird & Bird.

    If the UK joins the EEA (or enters a similar type of agreement that retains the EU freedoms) then the UK's domestic tax legislation is likely to be unaffected by an exit," KPMG said. "The EEA would likely be the best option from a purely (indirect) tax and business perspective. This will give access to the single market and existing trade agreements, allowing most goods to flow tariff free within the EU member states and EEA members," KPMG added.

    The Swiss model

    The EU has called the Swiss model "unwieldy and indicated that further arrangements of this kind may not be tolerated," according to Oliver. This may prevent the UK from choosing this route. Nevertheless, Austria's Finance Minister Hans Jörg Schelling has said he is "convinced" the future trade agreement between the UK and EU will be similar to the one between Switzerland and the EU.

    The WTO option

    Like many non-EU nations around the world, the UK can choose to form relationships with the EU and its member states via the WTO. The UK is already a member of this organization, as well as of the OECD and G20. The WTO's General Agreement on Tariffs and Trades and additional negotiated trade agreements could be used by a Post-Brexit Britain for trade.

    Which way?

    The UK government has not indicated which approach it may choose, or whether it may look for a unique agreement. More will be known after the UK triggers Article 50 of the Lisbon Treaty and begins negotiations.

    However, European Council President Donald Tusk warned that there "will be no single market 'à la carte'" menu for the UK government to pick and choose from for an agreement. It is likely that when the new UK Prime Minister leads the talks, some compromises will have to be made.

    KPMG expects Brexit will open up broader trading opportunities with those countries outside of Europe – such as China, India, Australia, and South Korea – many of which have already expressed a desire for increased trade.

    "The impact of this will of course depend on which countries, what market sectors, and how much investment is in question. Many of the countries falling into this bracket may now feel that they can do a better deal with Britain than they can with the EU because they may perceive Britain as having a weaker bargaining position (and therefore be more willing to enter into agreements and accept imbalanced terms of trade). What this may mean in practice is that the UK will gain speed in its international trade policy, but potentially at the loss of the (EU) bloc bargaining power," KPMG said.

    However, trade agreements between the UK and non-EU countries might be less advantageous and take a long time to conclude, the OECD has warned in its policy paper examining the consequences of Brexit (see Table 2).

    Table 2: Length of Free Trade Agreement negotiations, examples


    Time (years)

    Switzerland – China


    EU – Korea


    EU – Mexico


    US – Australia


    EU – Canada

    5 (not yet in force)

    EU – Switzerland


    Source: OECD Economic Policy Paper, April 2016, No. 16

    "With formal withdrawal from the EU, the current 36 FTAs of the EU covering 53 non-EU countries would no longer be applicable for the UK. New FTAs might be less advantageous than with the EU, with the bargaining position of the UK weaker than that of the EU as a whole," it said, noting that the average time needed to negotiate recent FTAs was at least 3 years. "The overall process could probably take longer than negotiations with the EU due to the large number of countries involved, with negative implications on trade, and could require additional resources," the OECD said.

    Got something to say? Take the Brexit Survey for in-house tax professionals here and contribute to the conversation. You will also receive the results of the survey direct to your inbox.

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