UK faces prospect of lowering VAT threshold after Brexit
London will no longer be able to use veto to keep current limit for small companies
Britain faces the prospect of being forced by the EU to lower the VAT threshold for smaller companies after it leaves the bloc because it would not be able to use the veto it currently enjoys as a member, a parliamentary committee warned on Monday.
The Commons European scrutiny committee’s report is one of the first concrete examples of Britain having to follow EU rules following Brexit after losing its voice in European discussions.
The cross-party group of MPs raised the concern following discussion in Brussels over a new VAT directive for small companies which proposes to set a maximum €85,000 (£76,300) turnover threshold for companies to be exempt from VAT administration across the EU.
The UK might have to follow the directive because “it will lose its veto over any future amendments on 29 March next year”, the committee said, referring to the date the UK is scheduled to leave the EU.
Britain has the highest VAT registration threshold in the EU and Philip Hammond froze it at £85,000 (€94,146) in his October Budget until 2022
If the EU legislation is passed after Britain leaves the EU but is in a transition period, where it has to follow all EU rules, the UK will have to cut its current threshold to bring it into line with the new directive. It could veto the proposal if it were a member.
Currently, the European Commission hopes to introduce the new rules by summer 2022, so any change is not imminent and the government hopes to have completed a long term trading relationship with the EU by then. But under the existing withdrawal agreement, the transition period can be extended up to the end of 2022.
The MPs were also concerned that if Britain did not conclude a new trading partnership with the EU, under the Northern Irish backstop, the province would have to follow EU VAT rules, so small businesses there would face the new VAT threshold even if they did not apply in the rest of the UK.
In addition, Brussels has made it clear that if Britain wants to retain the benefits of access to EU VAT systems and databases to ease frictions at borders in any long-term trade agreement, it is likely to have to sign up to common rules on the tax’s administration.
In each case, the committee warned of “the potential for the [EU’s] small and medium sized enterprise VAT proposal to lead to a substantial reduction in the UK’s VAT registration threshold”.
Britain will only be absolutely certain of avoiding EU VAT rules if it leaves the bloc with no deal, the MPs said but they highlighted that this was not a cost-free option. If Britain leaves without any agreement, “UK-registered businesses will immediately cease to be covered by the various simplifications to account for VAT on trade with the EU,” the report said.