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Brexit: What are the UK tax implications?

Exit sign

Just what might happen to the UK’s tax system in the event of a Brexit?

Marion Hodgkiss (Kaplan’s Head of Tax) and Michael Steed (ATT President and co-chairman of the ATT’s Technical Steering Group) discuss possible changes if the UK votes to leave the EU on 23rd March.

EU taxes

“The obvious big change will be VAT,” Michael states, “It is an EU tax and comes from EU Directives. These are addressed to and have to be copied in all of the Member States.”

“And it’s not just VAT that is an EU tax,” he continues. “We also have Customs Duties, which are levied on imports of many goods into the EU. Strictly they are duties and not taxes, so goods that are imported into the EU will have two layers of taxation – first the Customs Duties and then the local import VAT, depending on the rates of the Member State that to which it is imported.

“The key difference is that Customs Duties are never recoverable and so are a cost to the project. Import VAT is potentially recoverable under the normal EU VAT rules

“So if the UK does leave the EU, we will lose both Customs Duties and VAT.”

Marion agrees, saying: “VAT makes up a considerable part of the Chancellor’s annual tax take, about £110bn per annum, so it’s inconceivable that he will scrap it.

“I think he will be forced to continue with a VAT clone with probably very much the same rules. However, one main difference will be the ability to choose rates without needing approval from Brussels and changes will be at the behest of the Westminster Parliament.”

Michael commented that the VAT Act will need considerable redrafting, to take out the rules about trading between Member States, and this will take time.

“As far as Customs Duties are concerned,” he said, “the UK has some choice. It could be its own independent trading block and set its own rates of Customs Duties, or it could join say the European Free Trade Association (EFTA), or another group of countries.

“Various models have been touted, like Norway and Switzerland.  These countries have trading relationships with the EU and allow some goods to move duty-free between the states, but they maintain their own taxation codes.”

What about Corporation Tax (CT)?

Marion explains: “CT is a UK tax, not an EU tax, so we are free within reason to set our own rules.  The Chancellor knows that we have to have a competitive rate to attract overseas investment, or it will go elsewhere.”

But Marion warns we will not be immune from overseas pressures if we do leave: “At the moment, the UK has to forge law within the parameters of the EU fundamental freedoms (free movement of capital, goods and people).  If we leave, then these will no longer apply. We would still be influenced from the outside world, UK group relief rules are based on some of these principles and are unlikely to change.”

“The UK has also implemented the Diverted Profits Tax (the Google tax) in 2015, to target Multinational Corporations (MNCs) from artificially taking profits out of the UK,” she continues. Although it is a UK tax, it is modelled on the OECD model and springs from the international Base Erosion and Profits Shifting (BEPS) project.”

International tax implications

Marion also advises that there are some other international issues that would need addressing: “At the moment, we have an EU Parent/Subsidiary Directive which allows dividends to be paid to a parent company by a subsidiary company without a withholding tax being imposed. There is a similar arrangement for the payment of interest and royalties and this would need to be addressed to avoid costs to UK parent companies.”

Michael agreed that a Brexit vote would have major implications, both positive and negative , with big changes needing to take place, “For example the rules on State Aid (which are EU based) would need to be overhauled,” he said.

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