UK: BREXIT

On 31st October 2019 the UK is expected to leave the European Union (EU), with or without a deal agreed with the EU, unless a further extension is agreed. So what does this mean for UK tax law? 

To answer that question the tax team at REANDA UK takes a look on what might happen and how this could affect those trading with the UK.

To set the scene with our thoughts, anyone doing business with the UK needs to understand that any tax changes must be passed through Parliament. This means, theoretically, there should be no immediate changes to UK law after Brexit and therefore no need for any business to take any urgent action post 31 October 2019. 

Let’s start with Indirect Tax – Value Added Tax (VAT) 

Currently, UK VAT legislation is bound by the EU Principal VAT directive, as VAT is a European tax. Post Brexit, UK VAT legislation will not be restricted to the EU Directive, giving the UK government more scope to make changes to UK VAT. It is unlikely that the UK will abolish VAT after Brexit as it is a major income stream for the UK government, however, over time we could see some changes. 

Businesses operating within the UK charge VAT to individuals within the EU. In addition, any business to business sales between VAT registered entities within the EU is subject to VAT at zero percent so, effectively, no VAT is charged on these transactions. 

There are also no customs duties, meaning goods are traded freely within the EU nations. A no deal Brexit, however, is likely to result in duties and import/ export VAT being charged on goods and services that are transferred between the UK and the EU. Those potential, additional costs would make business between the UK and the EU more expensive and the UK could be at a disadvantage compared to other EU nations, as imports will become more expensive to UK businesses and exports will be less attractive to the EU nations. The reverse of that could mean the change would encourage more UK businesses to engage with each other and attempt to open more opportunities that way. 

The EU also has around 40 free trade deals with nonEU nations, covering more than 70 countries, allowing EU member states the freedom to trade without paying import tax. Post Brexit, the UK would lose its access to the trade deals available to the EU nations. To counter that the UK is aiming to negotiate its own trade deals with the non-EU countries and, in turn, replicate the agreements held by the EU. Independent from the EU and unrestricted by the EU Directives, the UK could, potentially, negotiate more favourable trade deals than those available to the EU member states.

Moving on to Direct Tax – Income Tax, Capital Gains Tax & Corporation Tax 

Income Tax, Capital Gains Tax and Corporation Tax are all UK taxes unlike VAT, which is a European tax. However, this does not mean that these taxes will not be affected by Brexit. 

Looking at Income Tax, individuals who are non-UK tax resident but are EU/EEA nationals, receive tax free personal allowances in the UK. This can be particularly helpful for individuals who are non-resident in the UK and have UK source income (e.g. property rental income). A UK tax free personal allowance preserves income up to £12,500 (2019/20) which is potentially at risk post Brexit if this is removed. 

There has been speculation that the UK could emerge as a tax haven with tax rates favourable in comparison to other countries. Should this materialise, it could encourage businesses to choose their base as the UK and in turn benefit from lower business tax rates. However, given the UK government’s efforts to align UK tax rules with international tax rules that negate the effect of tax havens, it would be surprising to see the UK contradict their previous efforts. The UK has also been a driving force behind the BEPS action plans introduced by the OECD. 

From 1 April 2020 we should see Corporation Tax rates decrease to 17% and if reports are correct we could see this reducing further over time. 

What about EU directives? 

Dividends, interest and royalties between parent and subsidiary companies are paid without the deduction of withholding tax, which is the purpose of the EU Parent/Subsidiary Directive. Post Brexit, this Directive will not apply to the UK. The UK does have double tax treaties with countries in the EU, which have the same effect of this EU Directive, however these do not all eliminate the withholding taxes on these types of payments. 

Payments of interest and royalties from the UK could be subject to grossing up and subject to a withholding tax of 20%. This may lead EU businesses to gross up payments further to take account of the withholding tax to support their cashflow. The UK does not charge withholding tax on UK dividends and therefore Brexit may bring no change on dividends paid by UK companies to EU companies. 

The effect on Employees 

A no deal Brexit could be costly for UK employees. Employees working within the UK and UK nationals working abroad will be anxious and uncertain of what a “no deal” Brexit means for them. 

There should be a transitional period while post Brexit law is introduced. Currently UK workers in the EEA are only required to pay social security contributions in EEA countries and not in the UK. Post Brexit, the UK may impose National Insurance contributions for British nationals even if they work in an EEA country and pay social security in that country. This means those individuals would be penalised by paying social security in both countries, a move that will be costly for both the employees and employers in the UK. It is possible that the UK may counteract this using double tax treaties. These of course, are subject to negotiations with other countries. 

In Conclusion…. 

There is uncertainty about the impact on companies and individuals. Whilst the benefits of being an EU member will be lost, the UK on a more positive note, will have complete power over its tax rules and treaties with other countries. Much of EU law is targeted at tax avoidance so it is likely that UK law will want to retain this.

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