A number of you have asked for our views on the effect of the UK leaving the EU. Many of these questions have concerned taxation. In this article we therefore provide some information on the possible tax consequences of the UK ceasing to be a member of the EU.
The main point to note is that many areas of taxation such as personal and corporate tax rates have been matters upon which the UK has been free to decide without reference to the EU. However, the prospect of exit from the EU may indirectly affect the rates set due to the perceived financial effects of Brexit by politicians. The likelihood is that such issues will be addressed in the Autumn Statement in November/December.
A potential benefit to business and business investors may arise post Brexit in changes to business reliefs. Reliefs such as R&D tax credits for SMEs have constraints placed upon them due to EU State Aid rules. Also, restrictions were placed on the eligibility conditions for the Enterprise Investment Scheme and related venture capital schemes in 2015 in order to ensure they complied with EU State Aid rules. Post Brexit, there will be freedom to amend these schemes.
VAT may be a tax which sees the biggest changes. VAT is a creature of EU law. It is a central principle of the EU that the harmonisation of VAT is essential to the achievement of a single market. The UK consumer sees evidence of the effects of this harmonisation in the form of the restriction on the UK government to reduce VAT rates on certain goods and services such as domestic fuel and power.
In theory, the UK could decide to abolish VAT and replace it with a sales tax on goods and services. This is extremely unlikely. VAT raises over £100 billion annually and the government will have enough other issues that will need to be dealt with.
However, it is likely that UK VAT law will become independent of EU law. Although a fundamental building block of VAT is the EU Principal VAT Directive, we have UK legislation which implements this - the Value Added Tax Act 1994 being the main source. UK legislation can be amended after exit from the EU to reflect different rates to goods and services without constraint.
A likely inevitable VAT consequence of Brexit will be changes to how businesses export and import goods to and from EU businesses. For example, when a UK business buys goods from EU businesses it makes an 'acquisition'. The transaction does not result in any VAT being payable - an entry in a VAT return being the only consequence unless the UK business makes exempt supplies. Post Brexit, the transaction is likely to be treated as an 'import'. Import VAT would be paid to HMRC at the time of importation. This would be reclaimed by the business on the next VAT return (unless the business makes exempt supplies), so the effect will be a cash flow issue compared to the current position.
How extensive the changes will be will depend on the negotiations to exit the EU and the system adopted for trade between the UK and the EU. Many options have been and will continue to be discussed. These changes may take several years to occur and please be assured we are here to help you with the issues that will arise.