Brexit & Tax

As negotiations begin for the UK withdrawal from the EU, what are the potential changes to the UK tax system?

VAT
As VAT is a European tax, UK Vat legislation has had to fall in line with the EU Vat Directive. When the UK leaves the EU, they will no longer be bound by the EU constraints, so in theory, the Vat rate could change, more goods /services could become zero-rated or, certain industries, like the tourist industry, could get their own Vat rate. It has been argued that an upside for UK business will be decreased cost of administration by doing away with the extra paperwork required by various EU directives, including Intrastat and EC sales lists. It is true that such paperwork will no longer be required, however given the likely increase in customs duty on exports and imports to the EU we will have to wait and see whether this proves to be the case. We are clear that VAT will remain and the UK will take a lot of the EU legislation into UK law, how much exactly though, remains to be seen.

Direct Taxes
It is more difficult to see what will change on the Direct tax front as a large number of EU Tax Directives have already been incorporated in UK domestic law, so on the face of it, leaving the EU will have no major effect here. It should also be noted that the more recent changes to international tax have a wider reach than the EU and are driven by the OECD. However, EU state aid rules have in the past restricted the availability of certain tax reliefs, notably Research and Development (R&D) and EIS relief. It will be very interesting to monitor what the effect will be on such reliefs, particularly given the UK’s stated aim of becoming the “best place in the world to start and grow a business.” Surely we will see these reliefs becoming more generous in an attempt to encourage multinationals to set up in the UK?

Employee Mobility

UK workers in Europe are currently only required to pay social security contributions to one Member State due to an agreement between all EU member states, plus four other countries. It is possible to be party to this agreement and not be a member of the EU, however as all countries must agree to the free movement of labour, it may be difficult for the UK to sign up. More cost and administration maybe on the horizon, but again exactly how much will depend on the outcome of the negotiations. Given the general uncertainty around Brexit it may be worth looking at setting up a presence in the EU. We have assisted a number of UK based businesses with setting up in Ireland lately and the major driving force in doing this is to retain access to the single market and provide certainty about the future. I believe over the next two years we will see more of this, but as with all things Brexit the outcome will not be known for at least two years and it will all come down to the negotiations.

Interesting times ahead!

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