We are not in the EU, so why does EU VAT law matter to me?

Why should I read this?

This is relevant to any ongoing dispute with HMRC over the payment of VAT. EU law still has a part to play.

How could this affect me?

We have set out three scenarios below, and the answer will change depending on the VAT return period which is the subject of the dispute.

The answer will also be different if you are based in Northern Ireland and the dispute relates to a supply of goods with the EU. A business buying or selling goods, which is based in Northern Ireland, is still bound by EU VAT law. The Windsor Framework has further details on the arrangements in place to manage the Northern Ireland Protocol and allow frictionless trade between Northern Ireland the Irish Republic.

If your dispute relates to an intra-EU supply of goods and you are based in Northern Ireland, you should refer to the pre 31^st December 2020 position, regardless of the VAT period in dispute.

Pre 31^st December 2020

The UK was bound by all principles of EU VAT law, which included “consistent interpretation” and “direct effect”.

In summary, if you are in dispute with HMRC over the payment of VAT on pre 31^st December VAT returns, your dispute will be bound by the provisions of both the domestic and EU VAT legislation, which was in force at the date of dispute. It will also be bound by domestic and EU case law, to the extent that it provides clarity in relation to the legislation in force at the time.

1^st January 2021 to 31^st December 2023

To a more limited extent, the UK remains bound by EU VAT law, courtesy of The European Union (Withdrawal) Act 2018 (“The Withdrawal Act”). This includes the principles of consistent interpretation and direct effect, but only in relation to EU VAT law enacted on 31^st December 2020.

By way of illustration, the freedom to diverge from EU VAT law for supplies made from 1^st January 2021 allowed the UK to extend the zero-rate to women’s sanitary products from 1^st January 2021. The UK was not allowed to extend any zero-rates while it remained bound by the principles of EU VAT law.

If you are in dispute with HMRC, your dispute will be bound by the provisions of domestic VAT law, which was in force at the date of dispute. You will also be bound by the principles of EU VAT law, to the extent that EU VAT law remains relevant to domestic VAT legislation, which remained unchanged between 31^st December 2020 and 31^st December 2023.

From 1^st January 2024

For supplies made from 1^st January 2024, we need to take account of The Retained EU Law (Revocation and Reform) Act 2023 and Clause 28 of The Finance Act 2024.

HMRC issued Revenue & Customs Brief 4 on 15 April 2024, which sets out their views on the above legal provisions in the following terms:

Consistent interpretation – UK VAT law must be interpreted consistently with EU VAT law. In practice, this means that poorly drafted domestic law can be interpreted by EU law, as UK law is required to enact the principles of EU VAT law.

Direct effect – If UK law is either completely absent or contradicts a clear and unambiguous provision of EU VAT law, the UK taxpayer can rely on the direct effect of EU VAT law. This right does not extend to HMRC, which is bound by its own domestic provisions.

HMRC policy for VAT and excise is unchanged. Section 28, Finance Act 2024 means that UK VAT and excise legislation will continue to be interpreted in the same way as it was before 1^st January 2024. Drawing on rights and principles that have always applied for interpreting UK law, including the principle of abuse. This means, principle of consistent interpretation (sometimes known as the ‘Marleasing’ principle) continues to apply in interpreting VAT and excise legislation.”

However, businesses will no longer be able to rely on the ‘direct effect’ of EU law. It will no longer be possible for any part of UK legislation to be quashed or disapplied on the basis that it’s incompatible with EU law, as UK law is now supreme. This does not lead to any changes in HMRC policy.”

Domestic and EU VAT legislation will continue to evolve. For example, the Government’s intention to introduce VAT on private school fees does not need to take any account of EU law. Similarly, the EU’s intention to change the EU VAT treatment of digital services has no bearing on supplies made within the UK.

If you are in dispute with HMRC for supplies made after 1^st January 2024 and the legislation remains unchanged from law in place prior to 1 January 2021, then it should be read consistently with the EU law in place at that time. In all other cases, EU law has no relevance. You can no longer rely on direct effect for supplies made after 1^st January 2024.