Brexit may mean Brexit, but what precisely does Brexit mean and particularly in relation to the implications for UK Taxation? asks Linda Warner, Tax Partner
Following Theresa May’s speech in Florence and the cessation of the latest round of negotiations in Brussels, it is worth considering how the UK leaving the EU may ultimately change the UK tax landscape.
Some of the key issues and negotiation points concern:
- ongoing trade relations and;
- the core question of ‘freedom of movement’ of EU citizens.
Trading relationships and tariffs are a key consideration from a UK tax perspective. Customs duty is an EU tax imposed directly by EU regulations. Whilst it is anticipated that there would be no immediate changes to customs duties and VAT regulations, we cannot know for certain how the decision whether to leave or remain within the single market and/or the EU customs union, on a transitional or a long term basis, will change these provisions.
Anybody who supplies goods or services between the EU and UK will be familiar with the VAT reverse charge principle and the necessity of compiling EC sales lists. Will we still require this in the future? Or would VAT be chargeable on sales of goods and services between the UK and EU countries?
Could we see similar rules introduced as those in January 2015 to apply to those in digital services? The digital services rules can require businesses to register for VAT in a number of different EU countries. The mini one-stop-shop (MOSS) procedure was created to ease these provisions. It allows providers of digital services across the EU to report the resulting VAT liability on a simple return. Whether this facility will continue after we leave the EU is unknown – but given the importance of digital services to the UK economy, it should be a key consideration as part of our negotiations. Could there, however, be a potential benefit of the UK not being subject to EU regulation on VAT matters? The UK would then be free to consider its own zero-rating policy for certain goods rather than being joined to the EU categorisation.
Whilst we do not have a common tax base, we have become increasingly joined by directives. These will impact on how companies deal with their tax affairs, including the Parent Subsidiary Directive, the Interest and Royalties Directive and the Mergers Directive. Many of these will affect large businesses only, but in particular the Interest & Royalties Directive could have important cash flow considerations for any business that undertakes activity across EU borders, with the potential necessity to deduct and report tax on interest and royalties payments which currently are paid on a gross basis. The double tax treaties that we have with countries within the EU and more widely will therefore take on an increasing importance and significance in areas such as these. Not being part of the EU will, however, again allow us to determine our own tax rates for business. And, in particular, when we wish to provide incentives to UK business.
EU state aid provisions currently can be restricted. The EU seeks to deny any country providing a tax advantage which could distort competition and trade within the EU region. This is often a concern in relation to subsidies and also incentives e.g. EIS and VCT tax relief schemes.
Freedom of movement
Finally, freedom of movement has become a key concern. Whilst the rights of individual citizens must be an important consideration, these provisions may also impact on businesses and tax. Will UK business still be able to easily access the right mix of employment talent? Similarly the potential cost for those businesses who have employees working across EU borders. Currently, the UK as a member of the EU, is a signatory to the EU Social Security Agreement:
a) for individuals
This provides a mechanism for anyone working in a different EU country to their normal country of residence, to be subject to the social security regime of only one of those countries.
b) for businesses
Furthermore businesses could face an increased social security cost. Likewise for those who work in a country for a short period of time. As a result they never benefit from the social security regime into which they have contributed, whilst they are left short on their contributions into the UK system.
With the scheduled date for ‘divorce’ for 2019 preparing to be pushed out to 2021 following what could be considered ‘trial separation’. It will be a long time before we know many of the details and intricacies of the impact on UK tax and in particular UK business.