Tax & admin · 29 June 2016

Tax turmoil – Three rules that could disrupt small businesses after Brexit

The government will have renewed powers to set the VAT rate on consumer items following Brexit

On 23 June, the British electorate decided once and for all that the country’s future lied outside of the EU.

Whatever the short and long-term implications of Brexit on Britain’s small businesses, what’s guaranteed is a period of uncertainty over the UK’s relationship with the EU that could last months, if not years.

In this uncertain environment, businesses and consumers alike are likely to wait for the dust to settle before making investments or buying expensive products. Markets and the economy generally will no doubt fluctuate, and chancellor George Osborne may even call an emergency Budget – a measure that could bring about significant changes to the tax system.

Despite the uncertainty, company owners that stay vigilant and adaptable to change will still be able to compete and grow their business. We’ve looked at some of the implications on tax that small business owners should watch out for in the wake of the vote to leave the EU.

Changes to customs duty

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.

Company owners should consider carefully in the coming months whether their EU suppliers are necessary, could you switch suppliers to those that are UK-based? If currently operating in EU markets, should you consider moving your business’s operation to said markets to avoid large customs duty payments?

It may be advisable to hold off from making decisions until further details are revealed of what any new trade deal might have in store for small businesses.

Experts have warned that the UK may have to wait until it formally leaves the EU in two years’ time before it can renegotiate trade deals, since official responsibility for negotiating trade on behalf of all countries in the single market rests with the organisation. While EU rules still apply to the UK, it cannot engage in separate talks.


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.

European expansion

If company owners are considering acquiring an operation in the EU, it may be wise to act quickly, before Brexit negotiations are complete in the next two years. There are currently tax advantages for firms reorganising or merging across European borders.

Many of the EU’s rules are integrated into UK tax law and may continue to apply to reorganisations or mergers carried out by small business owners in Britain. It’s likely however, that local tax laws and incentives in the remaining 27 EU member states will not be extended to the UK following Brexit.

What does Brexit mean for small business owners? Read our comprehensive summary here.  

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Fred Heritage was previously deputy editor at Business Advice. He has a BA in politics and international relations from the University of Kent and an MA in international conflict from Kings College London.

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