Prior to Brexit, sales of goods to and from the UK were subject to the EU’s acquisition and dispatch system. After a vote to leave, these same goods may become exports and imports like any other good, and will be subject to customs duties and charges.
The EU maintains the authority to determine the framework for VAT rates across all member states. As such, it gives national governments the freedom to set their own rates of VAT as long as long as two conditions are adhered to.
Firstly, a standard rate of no less than 15 per cent must be applied to all non-exempt goods and services, and secondly, governments can only apply for reduced rates for goods and services listed in the VAT Directive. The UK government currently sets the rate of VAT at 20 per cent.
VAT is, on the face of it, one of the simplest tax rules out there. All goods are liable for it unless they’re everyday essential items, in which case they aren’t. However, there is a huge array of exempt, zero-rated and reduced rate goods in Britain, making the national VAT rules far from explicit.
Jaffa cakes, tampons, crisps and nuts, and even Cornish pasties have, for example, all been at the centre of heated debate and courtroom wrangling in the past, as policy makers tussle with brands to determine which items should be considered essential.
Taking back complete control over the VAT rules will make it easier for the government to use the tax to regain control of the economy in the aftermath of Brexit. The chancellor, with free reign to set VAT parameters along his own lines, could decide either to hike up VAT to increase revenue in the short-term, or lower it to get consumers spending again.
There are a number of practical hurdles that are likely to crop up once the UK is no longer a part of the EU’s customs union. Both exports and imports to and from the EU will need to be cleared through customs, costing companies time and money.
European businesses importing from the UK may become less incentivised to do so, as EU customs duties will likely apply to British products. Meanwhile, UK firms that rely on raw materials and goods from EU member states could face additional costs, as the British government might extend customs duty tariffs to imports from the EU.