What are the immediate tax consequences of the UK's vote to leave the EU in the so-called Brexit referendum?
There should be no immediate impact for any taxes, or any change in tax policy.
The UK will remain a member of the EU, and bound by all EU Directives and Regulations and case law until the withdrawal negotiations have taken place. That is likely to be two years from now, possibly longer, assuming the UK triggers the Article 50 of the Lisbon Treaty process by giving formal notice to withdraw. The timing of the UK giving formal notice is currently uncertain.
If no agreement with the EU is reached within two years of the formal notice then subject to the UK agreeing an extension period with the other 27 Member States, EU law, treaty obligations and access to the Court of Justice (CJEU) will cease to have effect at that time.
Can we assess now what taxes will change?
The areas most likely to change are VAT and customs duties. Customs duties law must change, at least formally, because the UK currently has none of its own legislation, but relies on EU Directives and Regulations, which will cease to have effect. VAT would also change because intra-EU supplies of goods and services are treated differently from supplies of goods and services to and from the EU.
Other changes are explained below. But it will not be possible to evaluate precisely what changes are likely to be made until it is known what path the UK will follow in its future relationship with the EU as each path will have different implications as to what EU law the UK is obliged to follow. As a practical reality, to be able to withdraw from the EU on good trading terms and to be able to take advantage of the single market, substantive change is likely to be minimal. The possible paths are most likely to be:
- UK joins the EEA - like Norway, Iceland and Liechtenstein, the UK would have access to the Single Market and avoid tariffs and customs duties on intra-EEA trade. But the UK would still have many key obligations of EU Membership including financial obligations and adherence to free movement of people which is thought to be among the principal catalysts for the 'Leave' vote, and would have no vote or veto.
- UK signs a bilateral agreement, like Switzerland - this would involve more limited access to the Single Market, and would not guarantee a Customs Union and freedom from tariffs. Again, there is likely to be free movement of persons, and compliance with many EU obligations, including contribution to EU expenditure. Negotiations could take several years.
- Free Trade Agreement - like Canada. This would bring less access to the Single Market, and tariffs are likely to apply.
- World Trade Organisation - the UK's membership of WTO is not affected by Brexit. There are rules governing trade between the Members, without preferential access to the Single Market.
It is hoped that the path agreed by the UK and the EU will be agreed as a matter of principle long before the end of the two-year period, and businesses can start to plan accordingly, although the detail may take longer to sort out. It is expected that the UK will sign one single agreement with the EU, rather than have separate agreements with each EU member state.
What will be the impact for the movement of goods to and from the UK?
- A movement of goods from the EU to outside the EU, and vice versa, has customs duties implications. Accordingly, once the UK leaves the EU, movements of goods to and from the UK and the rest of the EU will become imports and exports, with increased compliance obligations and potentially customs duties, unless the withdrawal agreement with the EU enables the Single Market to continue to apply (eg the UK becomes an EEA Member).
- Currently, duties are entirely governed by EU Directives and Regulations and rates of duty are set at an EU level. All EU Member States share common external tariffs with third countries.
- Accordingly, control over customs duties on goods imported to UK, and entitlement to retain the duties received would belong to the UK. The UK will need to enact its own UK legislation to replace the EU Directives and Regulations. It is likely that the UK will need to replicate the EU Law position in its own legislation in order to negotiate favourable trade agreements with the EU.
Equally, although the UK will control its own duty rates, it is likely that it will replicate the EU rates. Classifications and rules of origin are not expected to change fundamentally. The UK will of course be unable to rely on the trade agreements which the EU has negotiated with other countries, and will need to negotiate its own agreements. This could take years.
- The status of Authorised Economic Operation which enables a lot of red tape to be cut for importers, is likely to be replicated in the UK legislation, and we fully expect other simplifications and reliefs such as temporary importation, onward supply relief, and duty suspension arrangements to apply.
- It should be noted that the new Union Customs Code came into effect on 1 May 2016. Any new UK legislation is very likely to reflect this and the guidance. This makes the status of Authorised Economic Operator mandatory for exploiting certain customs simplifications, creates binding tariff information, objective rules of origin and new customs valuation rules (which make the use of the first sale of export no longer possible and less strict criteria will apply to include royalty payments in the customs value).
- It is however possible that the UK will be able to negotiate a free trade agreement with the EU resulting in no or very low levels of customs duties. However, there may be an increase in formal documentation requirements, and increased procedures and cost compared to the current position; and complication could arise over supply chains.
VAT implications of movements of goods between UK and EU
- Currently, the movement of goods between businesses to and from the UK and the rest of the EU (B2B transactions) falls to be treated as an "acquisition" and the acquiring business accounts for VAT in its jurisdiction, without VAT cash flow cost if it is fully taxable for VAT. There are compliance obligations such as EU Sales List and Intrastat for suppliers to comply with.
- Conversely, currently VAT is accounted for on business to consumer (B2C) sales by the supplier in its jurisdiction, or in the customer's jurisdiction under the distance selling rules over certain thresholds. The EU Commission as part of the VAT Action Plan has proposed to simplify the distance selling rules by bringing them within the Mini One Stop Shop allowing for electronic accounting of VAT in different member states, obviating the need for EU businesses to register for VAT in each member state where it has customers.
- Following the UK's exit from the EU, the acquisition rules and distance selling rules will no longer apply to movement of goods to and from the UK. Instead, movements of goods to and from the UK will be treated as imports and exports with different and generally more complex compliance obligations. The "importer of record", be it the supplier or the acquirer, or freight agent, will have the VAT obligations in the jurisdiction of arrival of the goods.
- A simplification known as "triangulation" applies to chains of supplies of goods between three VAT registered businesses in three different member states where the goods move only once from the original supplier to the end customer. Such triangulation relief may no longer apply where the UK is involved in the chain.
Excise duty on cross border movement of goods to and from the UK
Following the UK's withdrawal from the EU, the UK will be able to control its own rates of excise duty (eg on wine, spirits and tobacco) without influence from the EU. This is unlikely to result in significant change, because excise duties are not fully harmonised, and there is already UK legislation in place which implemented the EU Directives and Regulations.
How will the VAT rules change on cross border supplies of services following Brexit?
- There may be some changes in law and procedures, depending on the type of services supplied, but it is unlikely there will be a fundamental change resulting in a real VAT cost for business.
- Currently B2B supplies are accounted for by the recipient of the service in its jurisdiction under the reverse charge, and if the recipient is fully taxable, there is no VAT cost or cash flow cost. EU Sales list compliance obligations need to be fulfilled by the supplier. In contrast the general rule for B2C supplies of services is that VAT is accounted for by the supplier in its jurisdiction. But if the B2C services are electronically supplied or broadcasting or telecoms services, VAT needs to be accounted for where the consumer is based. The effective use and enjoyment rules can change the place of the supply.
There is also an important simplification for electronically supplied services, the Mini One Stop Shop, allowing a single electronic VAT registration and accounting system in a single member state so VAT can be accounted for electronically, in each member state where the consumers belong or are treated as belonging. Businesses established in the UK use the Union version of the Mini One Stop Shop rules.
- After the UK's exit from the EU, acquiring businesses will still have to account for VAT under the reverse charge on B2B services and there will be no substantive change. EU Sales list compliance may no longer be necessary. But B2C services will change at least formally. First, the Union Mini One Stop Shop will no longer be applicable for UK businesses. Instead they will need to transfer to the Non Union Scheme. It is expected that this can be carried out in a seamless fashion. Second, EU Regulation 282/2011, which currently provides the detailed VAT rules for cross border services, will cease to apply to the UK, but it is expected that the UK would implement its own version which follow the rules of the EU Regulation very closely. Accordingly, no significant change should result.
What other UK VAT implications will there be from Brexit?
- VAT is an EU tax, which is harmonised across the EU by VAT Directives and Regulations. The Directives allow Member States to have discretions, and accordingly each Member State of the EU, including the UK, has enacted its own legislation in accordance with the framework of the Directives with some individual differences which are quite significant in some areas. When the UK no longer needs to comply with EU VAT law, UK VAT could in theory be changed significantly but much will depend on the terms of the UK's withdrawal.
- Initially it is expected that the UK VAT system will change very little and will continue to follow very closely the EU VAT framework in all substantial respects, but in time there may be changes around the detail.
- The electronic input VAT refund scheme enacted pursuant to the VAT Refund Directive 2008/9 applicable to EU businesses incurring VAT in the UK, and UK businesses incurring VAT elsewhere in the EU, will cease to apply to UK businesses and to UK VAT. Instead, the non electronic scheme known as the Thirteenth Directive Reclaim Scheme which applies to non EU established traders will apply. This has different rules and time periods but is in substance very similar.
- Fundamentally, EU law and Court of Justice case law will cease to have effect after Brexit. This could give rise to changes to UK compound interest and similar claims, but EU law should continue to apply to pre Brexit supplies. It is expected that the UK courts will still regard the Court of Justice's decisions as persuasive although they will cease to be binding.
- It has not been possible to bring VAT within the UK GAAR (General Anti Abuse Rule) because VAT has its own EU based jurisprudence, namely the Halifax "abuse" doctrine. However after Brexit, the UK could apply the GAAR to VAT. The tests are different but similar.
- The good news is that the UK will be able to introduce reduced rates of VAT and new zero-rating provisions for charities and other sectors and lobbying is expected to take place, as the UK's hands will no longer be tied by EU Directives.
- The Tour Operator's Margin Scheme is a potential area of change but we envisage that, for consistency, the UK is likely to keep consistency with the EU (denying input VAT for tour operators, and requiring them to account for VAT on their margin where established).
- It is good news for the insurance industry. The UK's insurance exemption has been wider than permitted by EU VAT law. In particular, back office and claims handling services have remained exempt under UK VAT law, even though they are not covered by the EU VAT exemption. This was highlighted recently by the CJEU Aspiro case (C-40/15). The UK will not now need to bring its law into line with EU jurisprudence. Furthermore, the UK has the opportunity to clarify the VAT exemption for payment services, following the Bookit and NEC cases.
- These points said, we expect that VAT law very likely to keep track with EU VAT law in all, or almost all, material respects.
Could the UK impose stamp duty or capital duties on the issue of shares in the UK companies?
- The UK will no longer be bound by the Capital Duty Directive, and related EU law, and therefore could re-introduce capital duty to raise much needed tax receipts. However, it would be inconsistent with the UK's desire to make the UK an attractive holding company regime, with the lowest corporation tax rates in the G7 (20% but expected to reduce to 17% in 2020).
- The UK could ignore the ruling in HSBC Holdings plc and Bank of New York Mellon -v- HMRC  UKFTT163 TC and reimpose the 1.5% stamp duty charge on share issues into depositary and clearance systems, but this is unlikely.
Will the UK raise corporation tax rates?
- This is wholly a matter for the UK, unaffected by EU law, but the Treasury are unlikely to do anything that prejudices the UK as an attractive location for international businesses.
What about stamp duty land tax and other indirect taxes?
- These taxes (including Air Passenger Duty, Landfill Tax, Climate Change Levy, and Aggregates Levy) will not be affected by Brexit, as they are wholly governed by UK law.
How will Brexit affect corporate taxation?
- Direct tax is not likely to be so affected by Brexit, as direct taxes are governed by UK law. The laws enacted by the UK must comply with the EU Treaties, and Court of Justice case law relevant to them. The EU Treaties authorise the EU Council to issue directives, regulations and provisions which affect the establishment and functioning of the internal market. These Directives, which need unanimous acceptance, have been implemented by the UK and other Member States - examples include:
- the Mergers Directives - which facilitates cross-border reorganisations, divisions, transfers of assets mergers, absorption of companies without liquidation, and allows deferral of tax for shareholders and companies within the EU;
- Parent Subsidiary Directive - which eliminates withholding taxes on dividends paid by subsidiaries to parents, where there is a commitment to a 12 month (or 24 month) holding period and a 10% shareholding;
- Interest and Royalties Directive - which eliminates withholding taxes on certain interest and royalties;
- Mutual Assistance Directive on administrative co-operation between tax authorities, and including exchange of information on savings income;
- Recovery Assistance Directive - which helps with the collection of tax due.
- Furthermore, the UK, as a member of the EU has had to comply with the four fundamental treaty freedoms, the freedom to provide services, the free movement of people, the freedom of capital, and the freedom of establishment.
- When the UK leaves the EU, the UK will potentially be entitled to reverse or amend previous changes made to comply with EU law, and introduce new rules that do not comply. However, the UK's ability and will to make changes that conflict with EU law will likely be restricted under the terms of the withdrawal agreement with the EU, if the UK maintains its desire to make use of the single market.
In any event, many of the changes made by the UK to comply with EU law have been business friendly measures which have supported the UK's position as a leading and business friendly holding company regime, and the UK will be very wary of reversing them. The Merger Directive is a good example, which is implemented into UK law.
- Potentially, UK withholding tax (20%) on UK interest and royalties becomes an issue, once the UK withdraws from the EU and the Interest and Royalty Directive ceases to apply. However, the UK's wide network of double tax treaties will apply in the same manner as the Directives to remove withholding tax, although there may be some exceptions (e.g. dividends paid by a German/Italian subsidiary to a UK parent, or royalties paid by a UK company to a Luxembourg company). The terms of double tax treaties will need to be checked.
- Furthermore, while the Mutual Assistance Directive would no longer apply after Brexit, as a member of the OECD, the UK has signed up to similar obligations. The UK is also likely to adhere to EU-endorsed accounting standards, IFRS, although new UK GAAP is an alternative.
- All that said, if the UK were to join the EEA then it would continue to be subject to the EU Treaties and enjoy the benefit of the EU fundamental freedoms. If the UK does not become part of the EEA, it is still unlikely that the UK would amend its tax laws to revert to its former position (distinguishing between UK and non-UK taxpayers) if relieved of the constraints of EU law (assuming the tax systems of EU member states do not discriminate against UK businesses).
Any temptation to restore the UK tax system to one which favours domestic companies might be counterbalanced by an incentive to maintain the UK's attractiveness as a place for multi-nationals to do business and as holding company jurisdiction, and could jeopardise the trade agreements the UK will be keen to negotiate.
- For some years, the EU Commission has been pushing for full harmonisation of corporate tax notably through the introduction of a Common Consolidated Corporate Tax Base (CCCTB) and more recently through a uniform response to the recommendations made by the OECD in its Base Erosion and Profit Shifting (BEPS) reports last year. While the UK has been a supporter of the BEPS recommendations (see below) it has been an opponent of the CCCTB leading some to suggest that a Brexit could result in an acceleration of its introduction. But the EU will not want to risk antagonising other member states at this sensitive time.
Does the UK have to comply with the State Aid Rules?
- The prohibition on state aid (a branch of EU competition law which prevents member states from giving subsidies and other aid to particular businesses or sectors) has been used to scrutinise the design of some EU tax systems and tax rulings given to multi-national enterprises. In certain high profile cases (involving Starbucks, Fiat, Apple, Amazon etc) the EU Commission has already decided that tax rulings were overly generous to the multi-national taxpayer and ordered recovery of the estimated 'underpaid' tax from the companies involved (though the cases are on-going and subject to appeal).
- Following Brexit, theoretically the UK will be free to grant state aid or incentives as it chooses although if it is not subject to state aid rules itself, it will likely have no means to have other member states challenged over their tax ruling practices and tax systems. But however this is subject to the terms of its withdrawal from the EU. State Aid restrictions are likely to be a key part of any future agreement between the UK and the EU (as they are in the EEA agreement) and in any event harmful tax competition is a key target of the OECD BEPS project, see below.
How would social security contributions for internationally mobile employees be affected?
The UK is part of the EU social security contributions system which means that UK workers who work in more than one member state or who move between member states are only liable to pay social security contributions in a single member state. Following Brexit, unless the UK agrees to be part of the EU system, workers may be liable to double social security contributions in both the UK and the EU member state in which they are working. Accordingly, we expect this to be agreed.
What about BEPS?
Following Brexit, the UK will still be subject to international bodies such as the OECD with its Base Erosion and Profit Shifting (BEPS) project, the Common Reporting Standard (the global standard for exchange of financial account information between tax authorities) and other 'transparency' measures such as country-by-country reporting. Indeed, the UK has taken, and we believe will continue to take, a leading role.
The EU has recently proposed its own anti-avoidance directive which seeks to implement many of the BEPS proposals as well as others. Although the UK will not be obliged to implement this EU Directive, it will still be subject to the same international anti-tax avoidance influences that provoked the proposal of the directive and we expect the UK to fully implement BEPS in line with EU member states. No change is to be expected here.
Will systems need to change?
Planning will be needed to adopt changes to ERP systems, and compliance processes (e.g. no EU Sales Lists needed), for VAT in particular, as well as imports and exports processes.
Tax codes, client references, invoicing and place of belonging evidence for customers will need to be reviewed and compliance procedures changed so VAT returns are accurate.
Will UK businesses and multinationals doing business in the UK need to establish themselves in an EU Member State instead of UK?
- We think any such change now would be premature, and it is likely that the terms of UK's withdrawal from EU will make change unnecessary in almost all cases. That said, the following issues arise.
- Financial services groups authorised in an EEA state have the right to carry on permitted activities in any other EEA state by exercising the right of establishment or the right to provide cross border services (called a passport) may need to move if the UK leaves the EEA, without negotiating equivalent passport rights.
- Withholding tax issues on interest, royalties and dividends need to be confirmed if reliance is currently being placed on the Parent-Subsidiary Directive/Interest Royalty Directive which may cease to bind the UK. This may be a particular issue for Gibraltar. Double Tax Treaties need to be checked.
- Manufacturing and retail businesses involved in cross border sales of goods need to watch the future customs duties position, and VAT compliance rules. Moving one's own goods from or to the UK may have different VAT and customs duties consequences.