The House of Commons. European Scrutiny committee has published a report on the EUs proposals for VAT reform.
The key area from a heritage perspective is on introducing flexibility for member states to reduce VAT rates. The report notes that the Financial Secretary to the Treasury (Mel Stride) submitted an Explanatory Memorandum on the VAT rates proposal on 8 February 2018 supporting the Commission’s intention to substantially increase the flexibility for Member States to reduce VAT rates for more categories of goods and services.
The Minister notes that the proposed changes would mean Member States would have the ability to apply a zero-rate of VAT to women’s sanitary products, a flexibility which has long been sought by the UK Government. Similarly a zero rate for the repair and maintenance of heritage buildings would also become easier.
The report notes that given that the Commission proposal explicitly states that the new VAT rates system would not take effect until 2022 at the earliest, it is striking that the Minister does not indicate the proposal would not have a direct impact on the UK. Indeed, the Explanatory Memorandum indicates the Government has begun a ‘mapping exercise’ to identify how the proposal could impact on the UK’s current reduced and zero-rate exemptions.
The report considers that this indicates that either the Government believes the post-Brexit transitional arrangement (during which the UK will have to continue applying VAT law) may last well into 2022, or that it is considering seeking continued participation in the EU’s common VAT area afterwards to minimise new trade friction arising from VAT being charged as an import tax on goods flowing between the UK and the EU after Brexit (or, potentially, both).
The report states that the memorandum implies that the Government is operating, even if only provisionally, under the assumption that the UK might still be in the common VAT area when the new rules take effect. This ‘mapping exercise’ only makes sense if there is a belief in Government that the new VAT rates legislation could apply to the UK, either as a legal obligation or as part of a voluntary approach by the Government to keep UK VAT law broadly in line with the VAT Directive to minimise post-Brexit barriers to trade. If it did not, there would be no risk to any of the current zero-rates or other exemptions, as the Government could decide to maintain, modify or repeal them these irrespective of the restrictions imposed by EU law.
The Treasury has now launched an inquiry into VAT see the consultations section below.