On 23 June the UK decided to leave the EU. At this stage, it is impossible to predict the full consequences of that decision as it will depend on the outcome of negotiations surrounding the UK’s exit. These negotiations will take place over the next two years or so.
In this article, I intend to just touch upon some of the relevant issues that may impact on the UK tax system as a result of Brexit.Corporation Tax
The first announcement on tax occurred in the days immediately after the referendum when George Osborne, the now former Chancellor of the Exchequer, said that he intends to reduce the UK’s corporation tax rate to 15%. The rate is currently 20% and prior to Brexit there were plans in place for it to be reduced to 17% by 2020. The reason for this announcement is to incentivise multi-national businesses to remain in the UK. It remains to be seen if the new Chancellor will also adopt this policy.
Corporation tax is a UK tax, but nevertheless over recent years it has been significantly shaped by EU law and EU directives. There have been some notable successful challenges at the Court of Justice of the European Union (‘CJEU’) on the grounds that UK tax law was in breach of the freedoms enshrined in the EU Treaty. In theory therefore, the UK will no longer be bound by decisions of the CJEU, although it remains to be seen to what extent the UK will rewrite its tax code to eliminate these decisions.
One particular area that affects the levels of certain UK tax reliefs (eg: tax relief on research and development expenditure) is the EU’s legislation in respect of state aid. However, the UK’s ability to ignore these rules is likely to impact on the terms of any future deals with the EU.Customs Duties
The EU is a customs union. Therefore, goods are supplied freely within the EU without the imposition of customs duties. Unless an equivalent trade agreement is negotiated with the EU, exports and imports of goods between the UK and the EU will become more expensive as they will be subject to customs duties. The effects will extend beyond the EU as well, because of the favourable trading terms the UK has with other countries, as a result of being a member of the EU.VAT
VAT is a truly European tax. UK VAT legislation has had to fall in line with the EU Principal VAT Directive. In recent years, the UK has had to repay significant amounts of VAT to businesses for failing to comply with the EU Directive. Therefore, it is likely, that the UK Government will have more freedom in future when formulating its VAT policy.Individuals and Personal Tax
Individuals who own properties in other EU states could find that they are no longer protected from the punitive tax and social charges that are imposed by some EU countries on non-EU/EEA nationals (such as France where taxes on capital gains can be as much as 49%). However, future negotiations between the UK and the EU may secure continued protection.Social Security Contributions
Workers who are nationals of one EU member state but who live and work in another EU state are currently only required to pay social security contributions in one state. Hopefully agreements can be reached so that such arrangements can continue.Conclusion
This is undoubtedly a period of uncertainty for the UK, but it is hoped that favourable deals will be negotiated with the EU in the coming months. It is too early at this stage to accurately predict what the final tax implications will be and, in my view, in most areas, immediate action is unlikely to be necessary.
If you would like to discuss the contents of this article with me or if you have any other questions about UK tax, please feel free to contact me
on 01842 755032.