RegulationJun 27 2016

Taxes set to be changed as a result of Brexit

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Taxes set to be changed as a result of Brexit

The reshaping of our relationship with the European Union will determine the future direction of the UK tax system, according to George Bull, senior tax partner of accountancy firm RSM.

As chancellor George Osborne announced this morning (27 June) that there will be no immediate emergency Budget, accountant Mr Bull gave his views on the impact of the decision to ditch the European Union on the taxes paid by your clients.

Mr Bull said the referendum had held up around 40-odd pieces of tax legislation which will now be reactivated.

Most of these will come into force between late 2016 and April 2017.

Looking ahead to the immediate and the medium-term, Mr Bull pinpointed the changes we might see in the UK tax system as a result of Brexit.

In the period prior to exit, Mr Bull said two key principles guide the application of taxes within the UK.

Direct taxes are imposed by UK law but currently they must be operated in accordance with EU law.

VAT is both imposed and operated in accordance with EU law.

For direct taxes particularly, within these broad constraints, Mr Bull said the rates of tax and structure of the tax system will be set in accordance with the requirements of the tax raising powers of the parliaments in Westminster, Holyrood and Stormont.

After exit, Mr Bull said the UK has had a number of disagreements with the EU over the scope and operation of UK taxes.

These include patent box; changes to the taxation of controlled foreign companies; differential rates of insurance premium tax; and capital duty.

After the UK has ceased to be a member of the EU, Mr Bull said both the tax rates and the structure of the tax system will be determined according to the needs of the parliaments in Westminster, Holyrood and Stormont, subject to the terms of the UK’s settlement with Europe.

On the direct tax front, he said a number of changes are likely.

For many groups of companies, Mr Bull said the number-one direct tax annoyance is UK-to-UK transfer pricing, caused by the requirement for the UK tax system to be EU-compliant.

If the government wished to do so, Mr Bull said it could abolish these rules so that transfer pricing only applied to transactions between UK companies and those overseas.

For EU state aid rules, subject to the terms of the exit settlement between the UK and the EU, Mr Bull said these would no longer prevent the UK government from giving selective advantages to companies via advance tax rulings.

Incompatibilities between UK tax law and the EU will cease to be a problem on exit, Mr Bull said.

Mr Bull added it is open to question what would happen to the disputes currently before the courts, potentially involving billions of pounds.

When it comes to UK tax reliefs, allowances and benefits, Mr Bull said once the UK has ceased to be a member of the EU, it will not be necessary to extend these to both EU citizens and corporations.

Mr Bull said these could once again be restricted to UK citizens/residents and companies.

Following the UK’s exit from the EU, Mr Bull said VAT might be expected to continue in the UK in much the same way although it will be necessary for tax law to be changed to confirm that relief for import VAT will continue to be available.

He said there may also be issues with output VAT which could harm UK exporters unless a mechanism is developed to allow EU importers to reclaim import tax in much the same way as they do now.

After exit, Mr Bull said the interpretation of VAT law in the UK would not be bound by the European Court of Justice.

Even if UK VAT law does not change, Mr Bull said there could well be changes in the way HMRC applies VAT in the UK.

Specifically, he said the taxation of cross-border transactions may change.

Although the EU is developing plans to extend the “One-Stop-Shop” mechanism to non-EU suppliers of online sales of goods, Mr Bull said it is likely that many UK traders will, nevertheless, have to register for VAT in each country in which they trade.

Once the UK has left the EU, Mr Bull said some EU tax developments will proceed without UK influence.

He said this includes the EU Financial Transactions Tax as well as the Common Consolidated Corporate Tax Base.

Mr Bull said: “The next few years promise to be very challenging for individuals, businesses and tax practitioners alike.”

Before the chancellor’s statement this morning, the pound fell further in trading in Asia, down another 2.6 per cent against the dollar at $1.34.

In early trading on the London stock market, the benchmark FTSE 100 index fell nearly 1 per cent before recovering some lost ground.

emma.hughes@ft.com