The precise impact on UK tax law of the UK exit from the EU will depend on a number of factors, not least the nature of the UK’s future relationship with the EU. However, what is clear is that the UK’s membership of the EU has had a considerable effect on UK tax legislation and policy, such that the cessation of application of EU law may have potentially significant implications for the UK tax code.
Indirect taxation, particularly VAT and excise duties, is heavily influenced by EU membership. UK VAT law is based on EU VAT Directives and in theory, following Brexit, UK VAT could be repealed in its entirety. Although this is unlikely given the significant UK tax revenue generated by VAT, the UK would gain increased flexibility in determining the scope of UK VAT, including setting rates (for example, determining the goods and services which are to be zero-rated) and defining exemptions. The UK would become a “third country” from the perspective of other Member States, which would have implications for the imposition of VAT on cross-border supplies involving the UK. VAT may need to be charged on transactions where it is currently not charged and UK businesses may need to be registered for VAT in EU countries where they are currently not required to do so.
Direct taxation, including corporation tax and income tax, is generally regarded as an area of competence for Member States, but whilst a member of the EU, the UK has been required to exercise its power to tax in accordance with EU law, which has resulted in a number of changes being imposed on areas of UK tax law which were deemed incompatible.
Such changes have included extending the UK’s transfer pricing rules to transactions between all related enterprises (including where all parties are resident in the UK), extending the UK’s group relief rules so that a non-UK resident company acting other than through a UK permanent establishment can, in certain circumstances, surrender losses to a UK company, adjusting the UK’s controlled foreign company (CFC) legislation to exempt CFCs which carry on a genuine economic activity within the EU or EEA, and the UK ceasing to impose a 1.5% Stamp Duty Reserve Tax charge on issues of shares and securities to clearance services and depositaries, which has had a positive impact by reducing the tax burden on IPOs.
When the UK leaves the EU, if it is then no longer bound to comply with EU law and the fundamental freedoms, it is uncertain to what extent (if any) the UK would amend these areas of tax law to revert to its former position (ie distinguishing between UK and non-UK taxpayers), and conversely whether the tax systems of EU Member States would 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 multinationals to do business and as a holding company jurisdiction. In some areas of law (for example, the CFC regime) the UK would in any event be constrained by international pressures, in particular, the OECD’s Base Erosion and Profit Shifting (BEPS) project, which aims to combat tax avoidance and aggressive tax planning on a global scale and which has produced proposals for anti-avoidance legislation which are recommended for implementation by all participating nations (including the UK).
Membership of the EU has also impacted the taxation of payments made between UK companies and associated companies that are resident in other EU Member States. EU Directives have provided a “blanket” exemption from withholding tax for payments of dividends, interest and royalties between associated companies in different Member States. The UK departure from the EU would mean this exemption would no longer apply and companies would need to rely on the terms of any relevant double tax treaty to reduce or eliminate withholding. In theory, this may make the UK a less attractive option as the location for a European holding company, but in practice, the UK has an extensive network of tax treaties, including with all current members of the EU, which will generally reduce or eliminate any withholding tax.
The UK exit from the EU may also, in principle, lead cross-border reorganisations to become more complex and less attractive from a UK tax perspective. At present, the EU Cross-Border Mergers Directive provides for tax relief for mergers and transfers between companies incorporated in different Member States, provided certain conditions are satisfied. When the UK leaves the EU, relief may no longer be available to UK companies involved in cross-border mergers. In practice, cross-border transactions are often structured outside of these provisions, and therefore their absence from the UK tax code may not be of significant impact.
The Autumn Statement, delivered by Chancellor of the Exchequer Philip Hammond on 23 November 2016, was the first major fiscal event in the UK since the referendum. In terms of tax, the announcements were relatively low key, the Chancellor seemingly taking a pragmatic “watch and wait” approach to the uncertainty presented by Brexit. Although the Autumn Statement included no obvious measures specifically responding to Brexit, in the sense that on the whole the Chancellor did not take the opportunity to announce measures which were obviously aimed at creating a more attractive tax environment in the UK, there were several measures, including confirmation of the reduction in headline tax rates and some relaxation of the circumstances in which non-domiciled individuals can remit income to the UK without triggering UK tax charges, which offered some insight into the fine balance which the Chancellor is attempting to strike. This balancing act is further illustrated by the Government’s statement that it will “continue to consider the balance between revenue and competitiveness with regard to bank taxation, taking into account the implications of the UK leaving the EU”, highlighting that although the trend in recent years has been to impose taxation on the banks (including the bank levy and restrictions on their use of losses), this approach may now need to be reconsidered if the financial sector is set to suffer in the wake of Brexit.
Since the Autumn Statement, the UK Government has given some further indications as to how taxation may potentially be affected by Brexit. As detailed in the Introduction above, the UK Prime Minister’s speech on 17 January 2017 confirmed the UK’s proposal to leave the Single Market and EU’s customs union, with the aim of seeking a new “customs agreement” with the EU. On the prospect of no agreement being struck, the Prime Minister said “we would have the freedom to set the competitive tax rates and embrace the policies that would attract the world’s best companies and biggest investors to Britain”. The Chancellor of the Exchequer also contributed to speculation that the UK’s corporate tax rate may be lowered when he was asked whether the UK intends to become the future “tax haven of Europe”. He replied that he hoped the UK would remain “in the mainstream of European economic and social thinking”, but added that “if we are forced to be something different, then we will have to become something different” (interview with the German newspaper Welt am Sonntag, 15 January 2017). In summary, Brexit may lead to the UK having greater autonomy to create and shape its own tax regime and, in principle, would allow the UK to provide discriminatory incentives and reliefs to UK companies (although external pressures will still exist, principally as the UK moves towards implementation of the OECD’s recommendations from its BEPS project). However, post-Brexit, UK companies would have no recourse to the EU to challenge measures of other Member States that may operate to the disadvantage of UK entities, and restoring the UK’s tax rules to their pre-EU position may, in many cases, hinder rather than help the UK in competing for investment and business. In any event, most changes resulting from Brexit are unlikely to happen overnight as the process for changing legislation is generally a lengthy one. The nature of any changes will, of course, also depend on the form that any alternative settlement to full EU membership takes and would be likely to be influenced by the broader balance of the negotiations at large.