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Tax and Brexit: so what’s the score?

19th Oct 2016
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Sean Eastwood explains the implications of Brexit on the tax system and speculates about possible future changes

One of the questions that has arisen following the EU referendum is what impact leaving the EU will have on the UK tax system. The UK’s direct taxes are governed domestically and not by EU law, and while VAT has been incorporated into domestic law it is in essence a product of the EU, so it is the tax that is seen to be the most vulnerable to any post Brexit change.

This article considers how the impact of Brexit may affect the UK tax system going forward.

Individuals

In the run up to the EU referendum, the then Chancellor suggested that in the event of a vote to leave the EU an Emergency Budget would follow shortly afterwards as measures would be needed to address any impact on the economy. One of the measures suggested was an increase in the basic and higher rates of income tax, although talk of this has since subsided.

However, what the EU referendum has done at this moment in time is delay the publication of the formal consultations that are due in respect of Making Tax Digital. Making Tax Digital is one of the most significant changes to the UK tax system as we know it and the delays caused by the EU referendum are leaving practitioners short of time to fully understand how the new system will work.

April 2018 is the date that digital recording of income and expenditure, as well as quarterly reporting, will begin to be phased in and the concern is that the longer these consultations are delayed, the less time there is to consider the finer details. This poses the risk that the new system could be introduced with significant errors and insufficient help for those who are not digitally prepared.

Then there are the individual landlords who have been the target of recent Budgets, especially higher rate taxpayers with highly geared properties where relief for finance costs will be restricted as from 2017. If the Bank of England needs to increase interest rates, those with highly geared property portfolios will be faced with even higher tax bills. However, the fall in interest rates will help to soften the impact of these changes.

Corporates

The corporation tax rate is due to fall to 17% by 2020. Given its declining impact as a percentage of overall tax revenues, as well as concerns over the competitiveness of UK markets following the decision to leave the EU, it is possible that the rate could fall further as a way of maintaining the UK’s competiveness.

Other aspects of the tax system applicable to corporates will also need to be reviewed in light of the decision to leave the EU. There are, for instance, certain directives in place that are there to aid trade and investment between EU member states. For example, directives that eliminate withholding taxes on dividends paid to parent companies and on certain payments of interest and royalties. These will all need to be considered in some detail in light of Brexit.

The Enterprise Investment Scheme (EIS) and some other venture capital reliefs in the UK are currently bound by EU State Aid restrictions, which limit the amounts that can be invested in start-up companies while obtaining tax relief for the investor. There is the possibility that leaving the EU could mean a greater ability to invest in these start-up companies by providing more generous tax relief to investors who are no longer bound by EU restrictions. Similar relaxations for the tax relief applicable to research and development and Patents could also materialise to preserve the UK’s competiveness.

VAT

While most taxes in the UK are domestic and are therefore not under the jurisdiction of the EU, this is not the case with VAT. VAT is a product of the EU and is subject to its Directives, Regulations and court rulings, and is therefore the tax that is most likely to be affected by the decision to leave the EU.

Questions so far have ranged from whether the rate of VAT will go up or down, whether the rates on certain supplies change from a zero or reduced rate to a standard rate, and what will happen to the treatment of supplies moving between the UK and EU Member States?

What is for certain is that VAT is a valuable source of tax revenue for the Treasury so it is unlikely that the UK will do away with VAT altogether, although future changes should not come as a surprise.

In closing, while the decision to leave the EU will have a lasting impact on the UK economy, from a tax perspective nothing has changed at this moment in time and it is business as usual.

• Sean Eastwood is a tax specialist at Gabelle

This article is taken from “Accounting Practice” the ICPA quarterly magazine. Dedicated to supporting and promoting the needs of the general practitioner. You can find us at www.icpa.org.uk or email [email protected] or by phone on 0800-074-2896.

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