Now that the initial dust has settled on the Brexit vote, business owners up and down the land are starting to ask questions about the tax implications of leaving the EU.
Virtually every client I’ve seen since that momentous day on 23rd June has asked me a question on the subject and this has happened to every tax professional up and down the land. So today I will share with you the most common questions asked, together with what is likely to happen:
Can we expect to see any immediate tax changes?
No tax changes will take effect automatically as a result of the referendum vote. The process of leaving the EU does not officially begin until the UK gives notice of its intention under Article 50 of the Lisbon Treaty. Once this is triggered, the UK has a two year period in which to negotiate its withdrawal; this means that we should not expect to see major changes to the tax system as a direct result of leaving the EU until late 2018 at the earliest. However, in the meantime we may see tax changes indirectly caused by Brexit, such as increases in tax rates or changes to exemptions or allowances which are needed to enable the Chancellor to balance the nation’s books.
What is the likely effect on Income Tax and CGT?
There will be little change to Income Tax and Capital Gains Tax if the UK is within the European Economic Area (EEA); this is perhaps better known as the European Free Trade Area, which the government is trying to negotiate to stay in. However, if the UK is not constrained by EEA membership, the government is likely to want to repeal the changes it was forced to make, such as the transfer of assets abroad legislation. It would also have the freedom, if it was so inclined, to seek to impose increased taxes on, for example, the holding of residential property by non-UK residents.
What will happen to VAT once the UK leaves the EU?
VAT is an EU tax and the UK was forced to bring it in as part of our membership of the EU. Once we leave, the UK will no longer be obliged to maintain a VAT system, but, given its revenue raising potential, it is extremely unlikely that it will be abolished. Since VAT has been incorporated into domestic law, leaving the EU will not automatically abolish VAT and it will not change unless and until Parliament changes our laws.
It also seems unlikely that the UK would wish to start with a sales tax that is signifiacntly different to the EU bloc on its doorstep. At least in the early years, it seems probable therefore that there would be large similarity to the EU VAT, although over time the taxes are likely to drift apart in many of their provisions.
However, leaving the EU will give HMRC the opportunity to reconsider its operation and policy in relation to VAT. In particular it is likely to implement a significantly higher threshold for VAT registration, with the threshold probably rising initially to £100,000. Also the Government can change some of the more ridiculous EU VAT directives, such as taxing tampons and the famous case of the much loved Jaffa Cake, which is zero rated as a cake whilst Jammy Dodgers are liable to 20% VAT.
What is the likely effect on corporation tax?
The UK’s direct taxes, such as Corporation Tax, are purely domestic and are therefore not governed by EU law, subject to the requirement not to discriminate against EU nationals and to comply with the fundamental freedoms and state aid rules. If the UK leaves the EU but becomes a member of the EEA it will still be obliged to comply with these principles. Even if the UK did not become an EEA state post-Brexit, it is far from obvious that the government would necessarily rush to alter much direct tax law that has been consciously drafted to comply with EU law. For example, the UK’s non-taxation of foreign dividends is consistent with EU law but they also reflect the government’s wider policy objectives.
Will excise duties change?
The UK’s freedom to impose excise duties is significantly limited by EU directives and fundamental freedoms. Outside the EU, the UK would be free to protect UK industries eg beer, whisky and cider with low or no tariffs and to impose high duties on French and Italian wine. This could be politically very attractive to the government and would clearly demonstrate the sort of benefits that come from Brexit. Personally I would welcome a £1 being lopped off the price of a pint of real ale, and this would give a welcome boost to the pub and tourist industry, but may face a battle from the nanny state health professionals.
What will be the impact on customs duties?
Trade agreements and customs tariffs are the tax area probably most affected by Brexit. On leaving the EU, the UK will retain any bilateral agreements to which the UK is itself a signatory but will eventually lose the benefit of the agreements for which the EU is the signatory. As a World Trade Organisation (WTO) member the UK will at least have the certainty of knowing that ‘most favoured nation’ terms would be available, although this would be limited in scope. It would be then a question of seeking to negotiate better terms country by country or bloc by bloc, which is why the UK is likely instead seek to join the EEA or EFTA to strengthen its bargaining position.
How will non-doms living and working in the UK and other EU states be affected?
From a UK tax perspective, Brexit will have little impact on non-doms living in the UK. The UK’s tax rules on residence and domicile focus on whether an individual is resident or domiciled in the UK alone and make no distinction between whether an individual is resident inside or outside the EU. Indeed, the UK’s tax system for individuals who are UK tax resident but not UK-domiciled, known as the remittance basis of taxation is unique.
However, Brits who are non-doms in other EU countries but who pay their taxes in the UK, such as people retiring to Spain, may well find themselves taxed in future by their host country. Many European countries, such as Spain, operate wealth taxes albeit at low rates, but applicable to all your assets even those still held in the UK.
And finally, can we expect an emergency Budget?
During the course of the referendum campaign the Chancellor threatened an emergency tax increasing budget, should the UK vote for Brexit. However, since the referendum result and with a new PM and Chancellor, they have all but ruled this out. This is likely to mean that in the autumn statement we will get the first indication of the government’s early thinking on the post- Brexit tax landscape.
My thanks go to Darren Mellor-Clark and Andrew Scott from the Pinsent Masons Tax team for information used in compiling this Blog.
If you would like more detailed information on some aspect of UK Tax, send me an e-mail and I’ll be pleased to advise further.