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Brexit

Brexit - the tax implications

Now that the UK has voted to leave the EU, what are some of the potential key tax implications for your business?

It’s impossible to accurately determine the impact of Brexit as the terms of the exit haven’t been negotiated yet. Thankfully, much of the UK’s tax legislation is independent of EU influence so will be largely unaffected. However, there are a few notable exceptions that could affect your business.

Note. Income tax, capital gains tax and inheritance tax (IHT) are unlikely to change as a direct result of Brexit. Before the referendum, the Chancellor had threatened  an emergency budget with a 2% rise in the basic rate (currently 20%) and a 3% rise in the higher rate (currently 40%). He had also indicated that the rate of IHT might rise by 5% (currently 40%). However, this morning he said there will be no emergency budget in the immediate future.

VAT

Probably the EU’s most significant influence over the UK’s tax system is with regard to VAT which is essentially an EU driven tax.

What’s unlikely to change? Once the UK leaves the EU it may no longer be obliged to have a VAT system. However, we are fairly certain that VAT won’t be abolished as it’s such a hefty revenue raiser for the Treasury.

What could change? (1) Freedom from strict EU VAT rules would mean that the Treasury could change which goods or services are eligible for reduced rates or exemptions. For example, as touted by the Leave campaign, it may decide to remove the 5% VAT charge on domestic fuel (although we think this is unlikely as the Chancellor needs as much money as he can get). (2) There could be changes in how HMRC interprets current VAT legislation because interpretations of the VAT rules would no longer be bound by decisions made by the CJEU. (3) Depending on the terms the UK is able to negotiate with the EU, sales of goods to and from the UK may no longer be able to use the EU’s acquisition and dispatch system (accounted for on VAT returns). Instead there may be the imposition of “import” VAT - this VAT is likely to be recoverable but there may be an unwelcome cashflow cost for the period between the import and recovery for many businesses.

Tip. Consider how much more working capital you would need to finance the potential cost of a potential import VAT cost.

Customs duty

If Brexit results in the UK leaving the customs union, exports between the UK and the EU would need to go through customs and customs duties may be levied. This would put your business at a disadvantage compared with competitors within the EU. 

Withholding tax on intercompany dividends, interest and royalties

At the moment, where a parent company in one EU member state receives dividends, interest or royalties from a subsidiary company in another member state, there’s no withholding tax.

What could change? Once the UK leaves the EU, a group of companies with a parent company in the UK and subsidiaries in EU member states, or with a parent company in a member state and a subsidiary in the UK, may become subject to double taxation on dividends, interest and royalties unless a double tax agreement (DTA) prevents this. Luckily the UK does have DTAs with all the other EU member states, but be aware that not all provide for a 0% withholding tax. For example, there’s a 5% withholding tax on royalties paid to Luxembourg.

Tip 1. Look at whether it would be better overall to have foreign branches rather than foreign subsidiaries in the future.

Tip 2. Consider whether your current group structure will trigger withholding tax under the UK’s DTAs and, if so, whether they would be large enough to justify a group restructure.

Social security contributions

At the moment, if a UK worker works in another EU member state, they are only liable to pay social security contributions in that member state. Unless the UK agrees to be part of the EU system, workers may be liable to two lots of social security contributions - in the UK and in the EU member state that they are working in. If you have a large number of employees working in the EU, this could significantly increase your staff costs.

Luckily the majority of the UK’s direct tax legislation will be largely unaffected by Brexit. But if you import or export goods, then you could be facing import VAT charges and customs duties in future. And if you have employees working in the EU, you could end up being liable to two lots of social security payments. 

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