The result of the 2016 referendum, in which the UK voted to leave the EU, will have a number of significant implications for the UK economy.
As the UK prepares for Brexit, Simon Littlejohns, Partner and Head of Tax at Birmingham accountants and business advisers Friend Partnership Limited, considers some of the likely tax implications.
Customs Duty is one area that is likely to face significant change post-Brexit and will be particularly affected by the negotiations and agreements that are made. If the UK remains part of a Customs Union, little may change. However, if the UK breaks away completely, the changes are likely to be far more significant.
Currently goods can be supplied freely within the EU and European Economic Area, without being subject to customs duties. Once the UK leaves the EU/Customs Union, taxpayers are likely to face additional costs as a result of increased customs duties and import VAT.
If custom duties and import VAT are applied, the attractiveness of our exports will be reduced as they will be more costly, as will the goods we import. Furthermore, if an organisation is based in the UK and imports goods from outside the EU to sell within the EU, there will be additional duty and administration costs that will require consideration.
The EU has negotiated favourable terms with other countries, from which the UK has benefited. Once the UK leaves the EU it is likely that new agreements will need to be independently negotiated. The timeframe for negotiating new agreements is uncertain. In the meantime, the UK will be subject to less favourable terms, which are likely to result in additional costs which businesses may not be able to pass on to their customers.
In order to prepare for the likely changes to customs duties, organisations should take time to consider their existing supply chain and the likely impacts, as they may be able to make changes to the supply chain now.
VAT is a consumption tax levied in the UK under EU law, as amended following decisions of the Court of Justice of the European Union (CJEU).
Post-Brexit, EU legal constraints will no longer apply and there may be more freedom for the UK government when formulating future VAT policy.
Any changes to the VAT system will heavily depend on what form Brexit takes; if the UK was to remain part of a customs union, European influence is likely to be higher on VAT.
As VAT contributes a significant amount to the UK’s tax revenue, it is highly unlikely to be abolished completely, although it is speculated that there may be a temporary reduction in VAT on certain supplies to help stabilise the UK economy, post-Brexit.
Little planning can be undertaken until the precise terms of any changes are known.
Direct taxes are imposed by UK law, so are likely to remain unchanged. The current laws have been reshaped based on outcomes from the CJEU on the grounds that UK tax law was subject to compliance of the four fundamental freedoms in the EU Treaty – freedom of establishment, free movement of capital, free movements of workers and free movement of good.
Post-Brexit, some UK tax law may no longer be required to comply with some EU laws and some EU directives will no longer apply to UK companies.
It may be that further reductions in the rates of corporation tax and income tax are announced to stimulate the economy and encourage international investment in the UK.
In addition there are already moves to protect the UK tax base from erosion as a result of the exploitation of the rules for the taxation of international transactions. There are likely to be further moves to prevent tax ‘leakage’.
Currently there are a number of directives in place to provide tax reliefs within the single market – particularly around withholding taxes. The Parent Subsidiary Directive provides relief from withholding taxes on dividend income made by subsidiaries operating in different EU member states, and prevents companies from being taxed twice on profits made by subsidiaries.
Post-Brexit this directive will no longer apply and as a result UK companies could face withholding taxes and double taxation unless the UK negotiates individual tax treaties with each EU country.
However, this will take time and, in the meantime, businesses will need to ensure that they factor in to any contract negotiations the potential additional costs that may result.
State Aid regulations are imposed on governments to create a level playing field for companies across the EU. There are likely to be changes to the EU-driven tax rules which require that EU-resident individuals and companies be treated in the same way that HMRC treats UK-resident individuals and companies.
The requirement to comply with State Aid rules has resulted in the scaling-back of some UK tax laws, which were intended to boost the UK economy. Post-Brexit, the UK may no longer be required to comply with these rules, providing an opportunity to restore these tax rules to ensure they are more beneficial to the UK.
It is difficult for taxpayers to plan in advance of any expected changes but they should be prepared to revisit your financial and tax plans to accommodate any new initiatives which may be announced.
R & D Relief and Patent Box
The Patent Box tax regime is regulated by UK tax laws and should be unaffected by Brexit. This is also true for the UK domestic R & D tax relief regime. The rules are complex for both initiatives and are currently affected by the State Aid regulations mentioned above.
It will be interesting to see to what extent there is a relaxation of the State Aid restrictions with an exit from the EU.
Both initiatives provide valuable tax reliefs for businesses as is evidenced by Dyson’s decision to build an enormous ‘R & D campus’ in Wiltshire. The choice of location is likely to have been prompted by the very advantageous tax regime in the UK for innovative businesses.
It will be important for such businesses to understand how their current or future planned R & D reliefs might be affected by any changes.
Simon Littlejohns is a partner and Head of Tax at Friend Partnership Limited, and works predominantly with business owners, owner managed businesses, entrepreneurs and High Net Worth individuals.
Contact Simon Littlejohns on 0121 633 2000 or click here to email.
Since Friend Partnership Limited was established as a corporate finance boutique in 1983, it has grown into a well-respected Chartered Accountancy practice offering a full range of business advisory, accountancy and taxation advice and support services. It works principally with privately owned businesses operating nationally and internationally in a variety of sectors including manufacturing, technology, renewable energy, distribution, retail and construction, and range from entrepreneurial start-ups to well-established businesses.