UK and International Tax news

Brexit And UK Tax

Tuesday 28th June 2016

Following the UK referendum result on 24 June 2016, and given the process for leaving the EU, it is unlikely that there will be any immediate changes to the legal and regulatory environments, at least until a Budget Statement by the Chancellor which could take place in the autumn.

The House of Commons Library has produced a useful overview on tax after the EU referendum.  This confirms that taxation is very largely a member state competence such that the implications of the UK lying outside the EU are likely to be less significant for taxation compared with other policy areas.

However, a major exception to this generalisation is indirect tax and VAT for which there is a substantive body of EU law establishing common rules across member states and, to a lesser extent, excise duties.

The harmonisation of indirect taxes across the EU has been an essential element to the achievement of an effective single market. Unlike most internal market measures, which use qualified majority voting, the harmonisation of taxation is decided by unanimity. The consequences of the EU’s shared competence in indirect tax are most frequently discussed in the context of the UK’s limited discretion in setting the rates of VAT on individual goods and services. In addition many commentators have raised concerns about the UK’s ability in the future to maintain its existing range of VAT reliefs (such as the zero rates of VAT applying to food and children’s clothes) from any further harmonisation of VAT law.

However, the relative importance of VAT to the Exchequer, accounting for around 17% of all government receipts, suggests that future governments would be unlikely to substantially increase these reliefs or abolish the tax, even while exit from the EU would give them this power. It is likely that VAT will be maintained with a possible widening of the zero-rating and exemption rules or the use of lower rates.

There are no equivalent provisions with regard to other taxes, although the UK’s national legislation has to currently comply with the overarching provisions of the EU treaty guaranteeing the free movement of goods, persons, services and capital across the single market and prohibiting discrimination. There is a substantive body of case law where the ECJ has ruled that individual provisions of a member state’s tax code fail this test. Member states’ powers to act in relation to taxation must also be exercised in accordance with state aid rules.

There are also a number of EU instruments relating to administrative cooperation to exchange information and help tackle tax evasion. In the latter case, it seems likely that outside the EU, the UK will seek to maintain some form of bilateral agreement akin to these provisions, given the growing consensus between governments that there is a very important international dimension to taxing multinational corporations fairly and effectively tackling tax avoidance.

The European Commission had proposed an EU-wide tax on financial transactions in September 2011 but this has failed to attract unanimity. Whilst in January 2013 eleven countries, excluding the UK, agreed to pursue this option on a smaller scale, negotiations have continued, although there has never been any question of the UK having to take part.

Following the referendum vote, there have been a number of statements by relevant organizations including the Bank of England as well as speculation about the impact of Brexit. On 27 June the Chancellor confirmed that there was likely to be a Budget statement this autumn. Prior to the vote, Mr Osborne had indicated that in the event of a vote to leave the EU, the Government would have to make changes to its tax and spending plans.

In his statement the Chancellor said the following: “….this will have an impact on the economy and the public finances and there will need to be action to address that. Given the delay in triggering Article 50 and the Prime Minister’s decision to hand over to a successor, it is sensible that decisions on what that action should consist of should wait for the Office for Budget Responsibility to assess the economy in the autumn, and for the new Prime Minister to be in place.”

With regard to direct taxation, withholding taxes on dividends from EU subsidiaries or payments of interest or royalties to or from companies located in the EU may  generate cash flow problems.

Currently, the EU parent-subsidiary directive allows subsidiary companies to pay dividends to a UK parent company without the need to account for withholding tax. Similarly, companies often rely on the interest and royalties directive to make interest or royalty payments free from either UK or local withholding taxes.

If the benefit of these directives is withdrawn, companies would have to rely on existing bilateral double taxation agreements in order to reduce or eliminate withholding tax rates.

Although the UK has double tax treaties with all of the other 27 EU member states, more than half of these allow the tax authorities in the payer company jurisdiction to levy withholding tax. Although often at relatively low rates, it is another tax issue to be managed.

Given this, businesses may want to consider:

  • whether foreign branches rather than foreign subsidiaries should be used in the future,
  • whether the current group structure will trigger withholding taxes under the UK’s DTAs, and if so whether these will be large enough to justify a group restructure,
  • group financing arrangements within the EU and withholding tax on interest payments.

Groups can currently take advantage of EU provisions in order to undertake reorganisations or mergers of their European operations on a tax neutral basis. While these rules are incorporated into UK tax law and may continue to apply to reorganisations undertaken by UK companies, is likely that in the local rules in the remaining 27 EU member states would no longer extend to include the UK.

Given this, where businesses are considering acquiring an EU business, it could be beneficial to move more quickly before the UK’s exit negotiations are completed.

Key indirect tax considerations include the following.

On formal exit, the UK will no longer be part of the EU’s Customs Union. As a result, the EU’s customs duties could apply to imports from the UK, making it less attractive for EU companies and consumers to source goods from UK companies.

Similarly, the British government may extend the current UK customs duty tariff to imports from the EU, adding costs for UK companies reliant on raw materials and finished goods from EU suppliers.

Businesses should consider whether sales within the EU are large enough to justify moving manufacturing and operations to an EU site to avoid a customs duty hit on margins.

For imports, it will be necessary to compare total costs including duties from EU suppliers with those from potential non-EU suppliers.  From this it may be appropriate to considering changing suppliers or whether prices of goods need to be increased.

For importing materials or unfinished goods in from outside the EU, there may be a need for parallel inbound warehouses, i.e. one EU based and one UK based.

After a UK exit, sales of goods to and from the UK may no longer be able to use the EU’s acquisition and dispatch system, which is accounted for on VAT returns. Instead they would become imports and exports which would need to clear customs and incur import charges, triggering a cash flow disadvantage (the delay between paying customs charges and entitlement to recover the input VAT). This can be mitigated by using deferment and customs warehousing arrangements.

UK businesses, which are required to register for VAT in some EU member states, for example if they hold stock there, will have to appoint a fiscal representative locally to deal with their returns.

Given the above, businesses will need to consider working capital requirements to finance the VAT cashflow costs and how costs for VAT registrations and administration can be managed across the EU.

 

If you would like more information on the potential tax implications of Brexit, please contact Keith Rushen on 0207 486 2378.

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