The vote to leave the EU brings with it many challenges for UK business and not the least of these is the impact of Brexit on the tax environment that business will have to confront.
To ease some of these anxieties and to deter companies from leaving the UK, the Chancellor has pledged to reduce the headline rate of corporation tax to 15%.
For business, these are some of the principal areas of uncertainty.
The most immediate issue is the future of VAT – a tax which was introduced as a direct consequence of this country joining the European Union.
Our view is that it is almost certain that VAT or something very similar to it will be retained.
However, following Brexit, the UK would be free to decide that the tax applied to different types of goods and services than at present and rates could be set differently.
At the same time, firms undertaking cross-border transactions into the EU may need to be mindful of two separate VAT systems.
Although UK direct tax law is still the responsibility of the UK Parliament, over the last decade it has had to be modified in major areas to make it compatible with EU anti-discrimination laws. This includes the rules relating transfer pricing, group relief and controlled foreign companies.
If this anti-discrimination law no longer applied, the UK government might revisit its past responses to these challenges.
The Enterprise Investment Scheme, Venture Capital Trusts, Enterprise Management Incentives are likely to remain in place. These reliefs have had to be tailored in order to comply with EU rules on unlawful State Aid.
If these rules no longer applied, the UK government would be free to extend and increase these reliefs.
Although the UK has bilateral double tax treaties with the individual members of the EU, there are still question marks over the impact of Brexit on potential double taxation of profits earned by companies engaged in cross-border trade and the imposition of withholding taxes
The UK will continue to be bound by its commitment – as a member of the G20 and the OECD – to implement the recommendations of the BEPS (base erosion and profit shifting) project. The ongoing political uncertainty is unlikely to delay the restrictions on interest deductibility due to come into force in 2017.
Brexit may well also have tax consequences for individuals working in subsidiaries and branches in EU member states. The arrangements for these individuals to be subject to only set social security rules may not necessarily continue.
Groups which currently rely on EU directives such as the Parent-Subsidiary Directive or the Interest and Royalties Directive to reduce withholdings of foreign tax will need to review their arrangements in order to minimise increases to their overseas tax bills.
When the UK ceases to be a member of the EU, it will be open to UK courts to depart from decisions of the European Court of Justice (‘ECJ’).
For example, the decision of the ECJ in the Arthur Andersen Case (2005) and recent Aspiro Case (2016) called into question whether the UK VAT exemption in relation to insurance intermediaries is too widely drawn. However, after Brexit the UK could choose to disregard such decisions.
Ray Smith (Tax Partner) and the Clyde & Co tax team would be happy to assist in relation to any tax-related queries you may have.