For entities with operations in the United Kingdom (UK) and the EU, the determination of the income tax impact on Brexit will require some significant judgements to be made. These judgements should be based on the facts and circumstances of the reporting entity after considering the tax laws and regulations substantively enacted at 31 December 2020 because any future changes to tax laws requiring legislative activity cannot be taken into account. The change in the UK’s tax status (because it is not longer a member of the EU) could also trigger the application of a different set of existing tax laws, which means changes to existing current and deferred tax balances may result.
Following a General Election held in 2019, the UK left the EU on 31 January 2020. However, a transition period was put in place and that expired on 31 December 2020. During this transition period all EU rules and laws continued to apply to the UK. Towards the end of the transition period widespread media attention was given to the negotiations setting out the new arrangements that would come into effect after 31 December 2020. As noted in the press, the negotiations during the transition period focussed primarily on trading arrangements; they did not focus on the wording of the laws impacting income taxes.