Posted by Bishop Fleming on June 28, 2016
The UK’s decision to leave the EU will have implications for businesses, individuals, the economy and the tax system.
However, it is important to remember that the UK economy is essentially strong, competitive and ready for business, and that we remain a member of the EU for at least the next two years.
And whilst there will be movements in exchange rates and the markets in the short term, they will eventually find their level. In the meantime, interest rates are likely to remain low.
That being the case, there is little need to make decisions in haste. As the political landscape becomes clearer, so too will the type of relationship we will have with the EU. That will help to shape what actions businesses should take in future.
The Chancellor has already discounted the possibility of an early Budget in response to Brexit, but we can expect the Autumn Statement to set out a roadmap of how the UK’s tax and spending plans will evolve going forward. To that end it may be that the government finds it has more room to manoeuvre over the setting of future tax rates and the level of deregulation.
Tax policy is already very much up to the UK government to shape. Outside the EU it would have even more flexibility over the administration of direct and indirect taxes. Much will depend on the negotiations to take place. Such negotiations will shape reliefs such as EIS, EMI, R&D and Patent Box, which may all become more attractive outside EU constraints.
A number of recent changes to international tax have come from the OECD, and in particular its Base Erosion Profit Shifting (BEPS) Action Plan. These changes will be unaffected by Brexit.
VAT is an EU tax, but the rules have been mainly implemented by UK legislation, so not much change may be needed here. However, outside the constraints of EU law we may see an increasing amount of change, particularly on VAT rates and reliefs. Zero rating could, for example, be extended to cover a greater number of areas.
Bishop Fleming’s VAT Director has provided further practical advice on the VAT implications of Brexit, especially for those involved in EU trading.
The UK is currently part of a customs union with other EU member states so that goods can flow freely between us without customs duties or import VAT.
Although Brexit negotiations are likely to try to preserve the current flow of international trade with little extra cost for either workers or business, it is likely that transactional costs of trading with the EU will increase and that additional costs in the form of customs duties may also be considered.
Outside the EU, the UK will be free to negotiate its own free trade agreements with any country in the world, though such agreements can take many years to implement.
From an international tax perspective, the UK already has in place a wide range of double tax treaties, which will help smooth the transition to being outside the EU for direct taxes. Other treaties may need to be negotiated.
Some British citizens resident in other EU member countries may decide to repatriate to the UK, though before doing so they will need to consider their personal tax positions. Shortening a period of absence from the UK could have tax consequences.
Some EU citizens living and working in the UK may similarly consider moving to a country that remains in the EU. Again, their tax position will need to be considered before taking any action.
UK workers currently employed in another EU member country only have to pay social security contributions in one member state, avoiding double contributions. As part of the Brexit negotiations, one could expect to see similar arrangements put in place to avoid extra costs for businesses with international employees.
A substantial amount of EU pensions law has already been incorporated into UK legislation. To the extent that Britain is no longer bound by EU law following Brexit, it is not anticipated any immediate change would occur as this body of UK legislation would remain in place. Over time, we would expect to see some aspects of pensions legislation diverge from the EU position.
For the foreseeable future, that is for at least the next two years, the position on grants should not be affected by Brexit, though you may wish to read an article by our Grant Services Director on this.
There is the possibility that the UK government will take over any EU grants; indeed, before the referendum a number of government ministers guaranteed to “continue to fund EU programmes in the UK until 2020, or up to the date when the EU is due to conclude individual programmes if that is earlier than 2020”. Whether we can rely on this statement remains to be seen.
The process of leaving the EU will not start until the UK triggers Article 50 of the Treaty on European Union. It is not clear whether this has to be triggered by the Prime Minister or by Parliament. Article 50 controls the UK’s departure from the EU and provides some details on how withdrawal takes place. It states how the EU will conduct its side of the negotiations and provides for a 2-year renewable deadline for the negotiations. As there will be a delay before the trigger is pulled, due to the need to appoint a new Prime Minister, this will provide some time for the UK government to decide on a negotiating position.
The UK may seek to rejoin the European Free Trade Area (EFTA) and remain in the European Economic Area (EEA) in order to benefit from the single market. This would mean a continuation of free movement of people, capital, goods and services.
Alternatively, it may wish to be like Switzerland (which is in EFTA, but not the EEA) and negotiate bilateral agreements with the EU on a case-by-case basis.
Whatever the arrangement, there is likely to be a compromise over the level of access to the single market, and freedom from EU regulations and budgetary contributions.
As stated earlier, it is important not to act in haste. Too much is uncertain at this stage, and in any case we remain members of the EU for at least the next two years.
Some contingency plans on key issues may be required going forward as the political and economic landscape becomes clearer. Information is the key and at this stage there is not enough to make decisions.
Over the coming months we should start to see some clarity over how our relationship with the EU will evolve. We will also try to influence the shape of this relationship where we can.
In the meantime, please get in touch with your usual Bishop Fleming advisor should you wish to discuss the implications of Brexit for you.