Brexit Tax Implications, Tax System Issues – Direct Tax, Indirect Tax, Tax Cuts, Import Tax, Corporation Tax & VAT…
Introduction – Brexit Tax Implications/ Issues
So Mrs May’s plan on Brexit suffered a bigger battering than Burton Albion in last week’s league cup Semi-Final.
This article attempts to pick over the impact Brexit might have on the UK tax system. In other words what are the Brexit tax implications and issues?
Of course, what happens to the UK on 29th March still remains mired in chaos – just weeks away from the planned exit there is, well, no plan. Hardly a solid foundation on which to put together this article!
What is Brexit?
If you have not heard of Brexit then you are probably in the wrong place! Indeed, I could only assume you had woken up in a hospital in similar circumstances to 28 Days Later or the Walking Dead.
The simple part is that this is short-hand for the UK’s withdrawal from the European Union (EU). That is the easy bit.
The hard and controversial bit is on what terms it leaves the EU…
This was always going to be tricky and the UK’s politicial glass have certainly made it look nigh on impossible.
The Current Tax & Legal Position
At present, EU law is supreme meaning that it takes precedence over UK law. This was a point not lost on the Leavers.
Where a provision of UK tax law is found to be non-compatible with EU law then the offending legislation will either be read such that it is compatible or may be wholly invalid.
This initially may take place in a UK Court. However, a taxpayer does have recourse to the EU courts in settling any dispute in respect of his, her or its rights.
Those rights are most commonly in point when considering the EU treaty freedoms such as the Right of Establishment and Freedom of movement of Capital.
For example, these rights have been found to have been fettered on multiple occasions by a number of UK anti-avoidance rules. These rules have therefore had to be amended as a consequence.
In addition, EU rules may also intervene where there is a suspicion of State Aid. For example, where the Government is offering, say, reliefs to encourage investment in a particular industry or type of business (eg EIS reliefs and R&D tax credits).
Currently, the EU does not control direct tax matters.
A Member State is therefore able to set its own course in respect of direct taxes (for example – income tax, corporation tax, IHT etc). [That said, The EU announced this week that it will push to end national vetoes on taxation issues by the end of 2020. Something which hasn’t gone down well across the board.]
However, EU law does affect our direct tax laws particularly where it appears that tax rules might distort the market for example by discriminating against certain persons. These flow from the treaty freedoms which are described above.
In addition, there are also a number of EU Directives that will be relevant to businesses operating cross border.
|Interest and Royalties Directive:||The Interest and Royalties directive provides for a exemption on withholding taxes (“WHT”) in respect of royalties and interest.
|Parent / Subsidiary Directive:||The Parent / Subsidiary Directive provides for an exemption from WHT at source on dividends paid between EU companies.
In addition, there is also an exemption for dividends received from the parent companies.
Other similar directives also exist covering different types of cross border activity and payments…
When compared to direct taxes, there is much more significant harmonisation across the EU as far as indirect taxes are concerned.
As things stand, this gives the UK Government much less scope to chop and change what is subject to VAT and at what rate.
Before discussing the Brexit tax implications and issues we will first look at the current options.
Brexit – what are the options?
Theresa May has set out the following options regarding UK’s options:
- the Withdrawal Agreement negotiated with the EU
- No deal or a ‘hard’ Brexit; or
- No Brexit at all
However, from what we have already seen on the Brexit roller-coaster, there are probably other potential options (albeit some of these will be impossible to swallow for some factions in the debate):
- membership of the EEA;
- a separate deal negotiated with the EU – that is perhaps more acceptable to Parliament than the Withdrawal Agreement
We will now look at the potential Brexit implications and issues associated with each of those options.
The Withdrawal Agreement
The draft Withdrawal Agreement (“WA”) was published in November 2018. (Read PDF)
The plug was pulled on the first scheduled vote on this Agreement by Parliament in December 2018 as the Government did not believe it could get the required support.
This was prophetic as, on 15 January 2019, the Government suffered the biggest defeat in history.
Under the WA, the UK would say goodbye to the EU with effect from 29 March 2019.
However, as part of that departure, there will be transitional period. This transitional period will apply until at least December 2020.
Further, this transitional period can be extended.
Whilst the transitional period applies then the UK will still be subject to the Court of Justice for the European Union (“CJEU”). It will have to follow EU law.
What About The ‘Backstop’?
One of the main problems is the issue of the Irish border.
A ‘backstop’ will apply if no new trade arrangement is agreed by expiration of 2020.
The aim of the backstop is to avoid a ‘hard border’ between the north and south of Ireland.
But what does the backstop do?
Broadly, it creates a single customs territory between the EU and the UK. Under this arrangement, there will be no customs duties applied to the transfer of goods between the EU and the UK.
In addition, the UK will effectively promise not to charge lower tariffs than the EU on goods imported from non-EU countries
EU State Aid rules will continue to apply to the UK.
What will be the position of Northern Ireland under the backstop?
Generally, Northern Ireland (“NI”) will still be subject to EU VAT rules on goods and excise on goods (but not services). NI will from part of the same customs territory as the UK.
Businesses based in NI will still be able to sell products in the EU on an unrestricted basis without being subject to any checks.
However, goods moving from from the rest of the UK to NI will need to undergo checks. Some comfort may, or may not, be taken from the fact that the EU and UK have agreed that this should be in the ‘least intrusive’ manner possible.
Northern Ireland will continue to have unrestricted access to the UK market.
Despite the above, any goods that do originate from NI will still be deemed to be goods from the UK.
It should be noted that if a trade agreement is signed by the end of the transitional period then there should be no need for the backstop.
What about other taxes?
Further, it appears that under the WA the UK will agree not take an aggressive line on tax. This seems a direct attempt to prevent the UK from diverging too far from the EU’s tax position.
In other words, it appears to be an attempt to prevent the UK from setting itself up as European (or colder) version of Singapore.
No Deal Brexit
No deal means that the UK wouldn’t be subject to EU or EEA law from the date of departure.
There will be no transitional arrangements.
Neither the EU Courts or the Courts associated with the European Free Trade Association (“EFTA”) will be involved in any disputes.
Further, there will no longer be a requirement to comply with any of the EU freedoms.
Of course, this is not merely the hot topic of the freedom of movement of people. This also but includes the freedom of establishment and also the freedom of movement of capital. Again, these are protections that international businesses may find attractive.
In addition, the issue of State Aid would no longer need to be considered. This means that the Government would have greater freedoms over tax reliefs such as R&D, EMI and other reliefs. In other words, they will no longer be susceptible to EU interventions due to concern that these reliefs distort the market.
Without any additional legislation neither the Interest and Royalties Directive would apply and neither would the Parent / Subsidiary Directive.
Technically, the UK would not need to retain its VAT rules though any material changes seem unlikely. The Government would have some flexibility to tinker with the rates and could remove duty from certain items (it could potentially address the controversy over VAT on sanitary products).
Membership of the European Economic Area (“EEA”)
An alternative would be for the UK to become a member of the European Economic Area (“EEA”).
This small group of nations was established by international agreement.
In essence, it extends the single market to non-EU members including the three members of the European Free Trade Association (“EFTA”).
If the UK did become a member of the EEA then, unsurprisingly, it would need to play by EFTA’s rules. As such, the UK would need to comply with EEA law. Importantly, this would include observing the treaty freedoms.
This is the problem.
If the UK became a member of the EEA then it would need to observe the freedom of movement of people. Of course, this seems highly unlikely.
The Directives described above would not apply.
The same issues as set out for no deal would apply for VAT and customs purposes.
Conclusion – Brexit Tax Implications & Issues
As is plain for all to see, the terms on which the UK will leave the EU are as clear as clear as mud. The uncertainty of the terms of withdrawal flow through in to what the tax landscape may or may not look like. Like many quirks of life, the uncertainty makes it almost impossible for business to make contingency plans (and particularly for SMEs who do not have cash to burn on plan’s B and C).
However, hopefully in some small way, our article sets out some of the tax implications of some of the options on the table.
If you have any queries on Brexit tax implications and issues, or tax in general, then please get in touch. You can also read more on Brexit & Tax below…