Brexit: Tax issues to consider

The long term tax implications of a vote to leave will depend on what alternative arrangements the UK is able to negotiate. There will be a 2 year period following any vote to leave during which the withdrawal terms are agreed. So there should not be any immediate ramifications as the existing position should continue during this period. This time frame allows the UK to renegotiate its position going forward. Without knowing what future agreement including transitional rules are agreed, it is impossible to set out the long term tax implications. Attached are some tax considerations assuming no future agreement with the EU can be reached.

Customs Duties

  • Free trade Brexit would remove the UK’s participation in Free Trade Agreements which the EU has, covering trade with over 120 countries, and although the UK may elect to eliminate customs duty on imports from some or all of those countries, it does not necessarily follow that those countries will reciprocate, and may impose duties on UK exports.
  • Declarations Leaving the EU would abandon the free movement of goods which is one of the key benefits of the Single Market. Whether or not customs duty may apply to trade with the EU following Brexit, the fact that the UK is outside the EU means that customs declarations need to be made for all goods leaving and arriving in the UK – this will add time and cost to the supply chain, as well as requiring additional border control resources.
  • Lower limits? Exit from the EU would remove the freedom of people in the UK to purchase unlimited quantities of alcohol, tobacco and road fuel from EU countries, for their own consumption (end of the “booze cruise”). It would also prevent UK haulage companies from refuelling outside the UK without paying UK road fuel duty (currently around 20p a litre higher than its nearest EU neighbours). This will increase commercial transport costs, which will be passed on to consumers through increased retail prices

Mobility

  • Accessing talent Although Brexit is unlikely to lead to a mass exodus of EU nationals currently living in the UK, UK businesses may need to re-think how they bridge the “skills gap” if going forward they are not able to hire EU nationals without visa requirements.
  • Rising costs The cost of mobility is set to increase as frequency of flights and the ease and efficiency of business travel within the EU decreases. Organisations may need to re-think their business travel policy.
  • Social security Whilst the impact on tax is likely to be minimal, EU legislation governs the social security position within the EEA and Switzerland and in the event of a Brexit the UK would have to agree alternative agreements with EU countries to avoid potential double social security costs. Furthermore there could be an impact on state pension entitlements if contributions made to other EU countries no longer count towards state pension entitlement.
  • Regulatory burden EU legislation sets minimum standards in certain employment law aspects and ensures there is no discrimination. However, particularly small and medium sized businesses can find this administratively burdensome and a barrier to employment. Brexit potentially opens up the opportunity to step away from EU legislation in this area and to ensure that UK laws are fit to support UK businesses.

VAT/Direct tax

  • Import VAT and cash-flow if we exit the EU, there will potentially be Import VAT physically levied on the import of goods from the UK to EU member states and vice-versa.  This could have adverse cash-flow implications for businesses, as this Import VAT will likely need to be physically paid before the goods are cleared into the UK before the VAT is recovered through a VAT return.
  • EU VAT registrations and additional administration being outside the EU may mean that if the services provided by a British company requires a local VAT registration in an EU member state, then it may be forced (as an non-EU business) to appoint a local Fiscal Representative.  This will likely add additional cost and administration to providing certain services.
  • VAT rates we will likely gain new freedoms in relation to the setting of VAT rates.  Currently zero and reduced rates can only apply to specified goods and services set out in the relevant Annex of the European Principal VAT Directive.  However, if we leave the EU, then the Government could introduce additional reduced rates which would be beneficial to British consumers.
  • For direct tax we may no longer be able to benefit from EU tax directives such as the parent/subsidiary directive which provides for reduced withholding taxes on dividend payments to UK recipients. This may not have a huge impact as the UK has one of the most extensive double tax treaty networks. However the position should be checked as not all treaties reduce the withholding tax to zero”.