The past few months have seen a number of developments which will impact the operation of VAT on both a national and international level. Since the UK voted in June this year to leave the European Union, there has been much speculation on the effect that this will have from both an EU and global economic and social perspective. Whilst those wider issues are beyond the scope of this article, we look at some of the potential Irish indirect tax implications of Brexit. We have also outlined the key aspects for the EU Commission’s recently released action plan, which proposes to modernise the EU VAT system. Finally, we consider developments closer to home and look at the new tax appeal process which was introduced with the intention of modernising the overall tax appeal process by adding transparency and eliminating inefficiencies.

Brexit

During the UK referendum campaign, one of the main reasons cited for remaining in the EU was that membership allowed access for UK companies to the internal European market (made up of 28 Member States). This in turn allows movement of goods within the EU tariff-free for customs duty purposes and also, for VAT purposes where certain conditions are met the supply of goods between Ireland and the UK are “zero rated” in the country of dispatch with VAT accounted for by the VAT registered purchaser in the country of arrival. In the absence of any new agreements on this, Brexit may mean the application of costly customs duty to supplies of goods between the UK and Member States, which in turn could be expected to increase the cost of goods imported into the UK or exported from the UK into another EU Member States. For VAT purposes, as Irish import VAT is currently payable at the point of entry of goods into Ireland from non-EU countries, unless this process was simplified, importing goods into Ireland from the UK could mean a significantly increased cash flow burden for many traders who are currently used to simply “self-accounting” for VAT in their Irish VAT returns on the purchases, in a cash flow neutral manner. This new cash flow cost on imports could potentially be alleviated by applying to Revenue for an import VAT deferral authorisation (which currently permits authorised traders to remit the import VAT to Revenue by the 15^th day following the month during which the goods were imported) although this typically involves providing Revenue with security e.g. a guarantee.

Another issue would be the potential impact on how quickly imported and exported goods would move, compared to current intra EU despatches and acquisitions which are not “held up” at borders. Traders could also be expected to no longer be able to avail of certain VAT simplifications such as triangulation relief (e.g. where an Irish trader can sell goods which are delivered to UK VAT registered customers directly from a different EU country, without being obliged to VAT register or charge VAT in the UK on the sale) and consignment stock relief (where goods can currently be brought into Ireland from the UK by a non-Irish established trader and sold to Irish VAT registered customers, without triggering an Irish VAT registration obligation for the non-Irish seller). All of this may result in less efficient administration and potentially increase the cost of business for any trader involved in the import and export of goods to and from the UK. From a VAT filings perspective though, Irish traders that are currently required to file statistical VAT returns to record their trade in goods to and from the UK (e.g. Intrastat returns and also VIES statements for the supply of goods to UK VAT registered customers) and to quote their UK customer’s VAT numbers on their sales invoices may be pleased to learn that these formalities should not be required in relation to the UK following Brexit.

Although the above issues stem from the impact of Brexit on the single market, it was notable during the Brexit referendum that many UK voters seemed less concerned with the internal market and more drawn to the Leave’s side argument that the UK should be free to set its own laws, free from EU interference. Under the current arrangements, EU law takes precedence over national legislation in a Member State and for VAT purposes this means that while each Member State incorporates a VAT system into their national own legislation, the system is predominantly based on an EU VAT Directive, EU Regulations and EU case law. The UK VAT system will remain in place in its current form, however leaving the EU will mean that UK VAT legislation will no longer be obliged to comply with these various sources of EU law.

It is not possible to predict the exact impact of Brexit on indirect tax as this will not be known for years to come. However in the short to medium term, a departure we are likely to see in the UK from EU VAT law is in the area of UK VAT rates. While dramatic cuts to UK VAT rates may not occur, after leaving the EU the UK would be free to impose different rates of VAT on different types of goods and services. The UK would also be free to widen the categories of goods and services benefiting from “zero rating” and VAT exemption (whereas presently, EU Member States are required to maintain a standard VAT rate of at least 15% and can only apply reduced VAT rates or VAT exemption to specified goods and services). Traders here (ranging from Irish retailers in the border counties to any Irish traders doing business in the UK) are likely to watch any developments in UK VAT rates with interest but the matter of VAT rates has proved to be quite a divisive issue across EU Member States, with governments being restricted under EU law from reducing national VAT rates on certain goods and services despite coming under sustained public pressure.

EU VAT Action Plan

The subject of giving Member States more discretion over their VAT rates was a cornerstone of the European Commission’s recently released action plan. The action plan proposes to modernise the current VAT system to be fit for today’s global, digital and mobile economy. It plans to do this by simplifying VAT compliance, tackling VAT fraud and allowing greater flexibility for Member States on reduced VAT rates. It should be noted that the proposals are open to further discussions, with no guarantee that the proposals will be adopted (as any amendment to the EU Directive is an arduous process which requires unanimous support from all the Member States) but they help indicate the future “direction of travel” for EU VAT law and as such, it is worth monitoring the proposals. A key point in the proposals involves moving to a “place of supply” system for goods that is based on the principle of taxation in the country of destination of the goods. Such rules currently apply to the supply of telecommunications, broadcasting and e-services (“TBE” services) to private consumers in the EU and the Commission estimates that extending the “taxation in the country of destination” rules to more cross-border transactions could reduce cross-border VAT fraud by €40 billion per year. Multiple VAT registrations could also be avoided by permitting an EU trader to remit the EU VAT due on its sales through a single VAT registration in its “home” Member State (e.g. an extension of the “Mini One Stop Shop” or “MOSS” system which was introduced for the supply of TBE services to private customers in 2015).

The Commission also seems open to the concept of giving Member States more freedom in imposing different VAT rates on different types of goods and services. Pointing to the example of e-books and electronic newspapers not being able to benefit from the reduced VAT rates that are available to “paper” publications, the Commission acknowledges that the VAT rules could not have envisaged the dramatic technological and economic developments when they were designed over 20 years ago. In the action plan, the Commission sets out two different proposals to modernise the VAT rate rules. One option is to retain the list of goods and services that would be subject to a reduced rate of VAT, but to allow Member States submit applications to the Commission seeking to change the rate of a particular good or service. Where the Commission is satisfied that the change would not pose any risk to the functioning of the single market or distort competition, the change could be accepted. The other more radical option, is to abolish the list of reduced rates goods and services and permit Member States to set their own reduced rates. The Commission accepts that this option would need some safeguards, such as preventing the application of reduced rates to high-value goods and services. It remains to be seen which option (if either) will be adopted, however it can still be viewed as the first step on a long road to reform.

Tax Appeal Process

Looking closer to home, a key development over the last few months has been the introduction of the new tax appeal process with effect from 21 March 2016. Rather than applying for an appeal through the Revenue, taxpayers are now able to lodge an appeal directly with the new Tax Appeals Commission (TAC). TAC has been set up as an independent statutory body and it is hoped that this will enhance the independence and transparency of the process. Although the default position is for the hearing to be held in public, tax payers can request a private hearing. TAC is required to issue a written determination to the appellants within 21 days after determining the appeal however it may also provide an oral determination at the end of the hearing. Furthermore, TAC must publish their determinations (with any necessary redactions) not later than 90 days after notifying the parties to the appeal of the determination (and judgments have already been published on its website and via Twitter). Where hearings are held in private, the published determinations must protect the identity of the taxpayer.

Where TAC considers it appropriate and has notified the parties of its intention, TAC may now adjudicate a matter under appeal without a hearing. While either party may object to adjudication without a hearing, this right of objection will not apply where TAC is satisfied that it previously heard and determined on a common or related issue. Where this occurs, TAC is required to send a copy of the previous relevant determination to the appellants and request that the appellants state in writing within 21 days why it is not appropriate to rely on the previous determination. In the new systems, appellants no longer have the right to appeal a decision of TAC to the Circuit Court; however an appeal may still be made to the High Court on a point of law. It is envisaged that such steps should stop the build-up of cases that have hindered the appeals process in recent years, and also improve the transparency of the tax appeals process.

Conclusion

While it is difficult to ascertain the exact consequences of the developments set out in this article, there can be little doubt that they will have an impact on how VAT is operated on a national and international level for years to come.

Ethna Kennon is Indirect Tax, Director with KPMG, with 15 years’ experience in taxation advisory services. Ethna works with a wide range of domestic and multinational businesses to help them meet their VAT compliance obligations.

Email: ethna.kennon@kpmg.ie

Shea Higgins is an Indirect Tax, Senior with KPMG

Email: shea.higgins@kpmg.ie