This alert considers the possible impact of Brexit on some key UK tax aspects. However, this is only one side of the perspective: we will shortly be publishing a second article considering the potential impact of Brexit on elsewhere in the EU.
Among the general hand-wringing and brow-furrowing in the face of Brexit, some of the implications for direct and indirect taxation could be said to be more concrete, relatively speaking. In the corporate world, Brexit could impinge upon VAT, customs duties and the taxation of payments between EU group companies in particular. On an individual level, Brexit would be likely to affect the tax position of UK citizens living in other EU member states. The ultimate arrangements remain subject to the precise relationship between the EU and the UK following the latter’s departure.
Customs duties As just one rather pertinent example, the free movement of goods in the common market is tied to the European Communities Act 1972. Depending on the precise approach taken by the UK, the Act’s effective annulment in a post-Brexit world could mean that customs duties are applied on all goods that the UK exports to EU member states.
VAT in harmony Harmonised VAT regulations give EU businesses a relatively clear like-for-like framework. British goods, for instance, are distributed largely free from border controls, import VAT or duties. Even if leaving the EU means no longer being constrained by its VAT directives, the UK may find it practical and indeed business-friendly to maintain the indirect tax regime.
Such flexibility, however, presents the temptation to implement a rather more competitive tax framework than the EU’s harmonised regime. A punchy reduction in VAT rates could accomplish this in one fell swoop.
Intra-group payments The EU’s Parent–Subsidiary Directive stipulates that dividends paid by an EU subsidiary to its parent in another EU member state are exempt from withholding tax. Similarly, the EU’s Interest and Royalties Directive largely eliminates withholding taxes on interest and royalty payments between group companies of different member states.
As such, a UK group parent – as a non-EU parent – could find itself subject to withholding taxes on dividends, interest or royalties received from its EU subsidiaries. This would undermine the attraction of the UK as a location for holding companies, for example, inducing tax-driven corporate restructurings and the relocation of parents out of the UK and into the EU.
Individual considerations British citizens living abroad would be likely to feel changes to the tax regime quite keenly post-Brexit. By way of example, capital gains taxes for non-EU citizens living in France are levied at much higher rates: approximately 10 per cent in additional surcharges and social charges.
For those Britons resident in France for tax purposes, or in any EU regime that applies extra charges to non-EU citizens, it is not hard to see how limiting this could be for them, in particular when buying or selling properties.
Ongoing changes Though the impact of Brexit is undeniable (if energetically disputed), other increasingly important external influences on the UK tax system would remain. In particular, the OECD’s base erosion and profit shifting project is already having a significant impact on the UK corporate tax regime, and a post-Brexit UK would still be bound by and benefit from various existing double tax treaties.