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UK Must Leave EU VAT Area, UK's Lower House Votes

Monday, July 23, 2018

Upon leaving the European Union, the UK should not be included in the EU VAT area and adopt its own specific VAT regime, UK lawmakers agreed on July 16, 2018, in a move that may derail the Government's efforts to agree a Brexit transition period to cushion the impact of Brexit on firms.

After having secured as little as a three-vote majority in the House of Commons on July 16, 2018, Euroskeptic UK lawmakers won enough support for four amendments to be made to the Taxation (Cross-Border Trade) Bill. These included a proposal to drop a provision that the UK may include in ongoing negotiations continued participation in the EU VAT area.

Instead, one of the four amendments blocks UK participation in the EU VAT area. It had been suggested by the EU that at least Northern Ireland could continue to be included within the EU VAT area, to prevent a hard border emerging between the Republic of Ireland and Northern Ireland. Failure to agree a solution to the border issue on the island of Ireland would be a deal-breaker for the EU, which has warned otherwise of a potential no-deal divorce between the UK and the EU.

The amendment, passed with 303 votes for and 300 votes against, is expected to significantly handicap the Government in talks with the EU on a deal that would avoid this hard border, potentially leading to the most severe of "hard Brexit" options – a no deal with complete separation.

Reportedly, in approving the four amendments, the Government is now committed to seeking a VAT system separate from the EU's after Brexit (under ERG Amendment 73). In leaving the EU VAT area, among other things, the UK may not be compelled to align its law with EU VAT law, it may not be bound by the European Court of Justice's rulings on value-added tax matters, and it may not be compelled to collect VAT on behalf of EU member states. It would also result in an increase to VAT compliance burdens for UK firms transacting with EU businesses.

As well as passing the four amendments, a new Clause 37 was added to the UK's Brexit plans that contradicts the EU's plans for a so-called "Irish backstop," which would include Northern Ireland in the EU Customs Union.

Taken together, the changes could mean that talks on a Brexit deal could dissolve without a deal being agreed on a Brexit transition period, meaning the UK could abruptly leave the EU without a transition period on March 29, 2019.

With the aforementioned amendments, the House of Commons passed the Taxation (Cross-Border Trade) Bill on July 16, 2018. It will now be tabled before the House of Lords.