Much of the UK tax code is independent from EU influence, with a few exceptions (most notably, VAT), and therefore will largely be unaffected by Brexit.
In the areas that will change, however, the practical effects of Brexit for UK taxpayers may be more about changing certain of the technical rules than increasing (or decreasing) the overall tax burden on taxpayers. Amongst the most significant effects will be the following:
- Brexit may have an impact on the tax treatment of cross-border corporate transactions, as some of the rules governing how those transactions are taxed emanate from the EU. The impact will be felt soon after the UK leaves the EU, as the existing EU rules will no longer apply following the UK’s departure, and this may create some uncertainty about how transactions with a cross-border dimension will be taxed. The uncertainty will last until the UK negotiates bilateral treaties with individual countries to replace the EU rules.
- Other changes to the UK tax environment which Brexit may bring about are likely to be felt more in the medium to long term. For example, the UK will have more scope to reform the VAT system in future, though cuts in VAT rates are unlikely given the substantial tax revenue that VAT brings in.
- Changes to the rules governing the taxation of internationally mobile employees will also be an area the Government will have more ability to change following Brexit.
These issues, and the wider consequences of Brexit for tax law, are considered in more detail below.
- The scope and operation of the UK’s VAT system is governed by EU law and is, at present, largely harmonised with other EU Member States in order to facilitate European trade.
- Following Brexit, UK VAT will no longer be governed by EU law and the UK will be able to make potentially wide-ranging changes to the VAT system.
- However, VAT is a significant revenue raiser for the UK (accounting for around 19% of the total UK tax take in 2014-15), which suggests that reductions in VAT rates are unlikely.
- One area that may see change is the UK’s cross-border VAT rules, which are presently largely based on EU law.
- Following Brexit, the UK would have more scope to develop its own rules, potentially based more closely on OECD recommendations (see below).
- EU directives govern many aspects of the taxation of cross-border corporate transactions.
- These directives aim to reduce obstacles for businesses operating within the EU, to facilitate mergers and intra-group transfers of assets and shares, and to lay down rules on the taxation of group profits and withholding taxes on payments of interest and royalties.
- Following Brexit, these rules will no longer apply, although the UK may negotiate bilateral treaties with individual countries to replace them.
- UK businesses would still have the benefit of the extensive double tax treaties with other countries.
Social security contributions for internationally mobile employees
- The UK is currently part of the EU social security contributions system. As such, a UK worker who works in another Member State is liable to pay the social security contributions of that Member State only (and vice versa for Member State workers who come to work in the UK).
- Following Brexit, that system will no longer apply and workers may be liable to double social security contributions in both the UK and the other Member State, unless the UK signs up to the EU system as a non-Member State, as Switzerland did recently.
Reduced influence over BEPS and other international tax policy
- The OECD has increasing influence over the future direction of the international tax system, demonstrated by the on-going Base Erosion and Profit Shifting (BEPS) project, in which the UK is heavily invested.
- Once completed, it is expected that BEPS will give rise to far-reaching changes to the UK tax code.
- Brexit could diminish the UK’s influence in international tax policy, as the EU arguably exercises considerable influence over the future direction of BEPS and OECD policy in general.
What can businesses do to prepare?
- Assess whether you use the UK as a gateway to the EU. If so, will Brexit have an impact on your tax structuring or supply chains?
- Consider whether currency fluctuations during the transitional period may cause unexpected tax charges.
- Stay abreast of developments in business tax rates and tax incentives that may be introduced as a consequence of Brexit, and which may make the UK a more attractive base for investors.