We have less than 12 months until the UK finally pulls out from the EU, and yet businesses and accountants are still unsure what will and will not change. Tax policy is one of the fields with the biggest questions. Will the UK follow a “Singapore model” which will look to attract companies with a laissez-faire approach, or is such an approach unfeasible? With the EU no longer influencing tax policy, what will corporate taxes or the VAT look like?
These are hard questions, and no one can say for certain what UK tax policy will look like next April. But by looking at what could change and considering multiple possibilities, UK businesses can start hoping for the best while potentially preparing for the worst.
VAT is arguably the single biggest tax-related Brexit issue as the EU mandates that all of its member states have a VAT. Some MPs have gone so far as to suggest that the VAT could be abolished completely and replaced with an alternative, but that is incredibly unlikely. A more reasonable alternative could be that the UK could decide to change VAT in ways not allowed by the EU, such as expanding the number of taxable VAT rates beyond the current maximum of three. This could allow more flexibility, though companies might suffer from increased administrative costs figuring out when to apply the different rates.
But even if the VAT stays, major changes will result concerning the import VAT. Goods coming into the UK from EU countries will now be charged with an import VAT, driving up the cost of goods and hurting bottom lines everywhere. Furthermore, the BBC reported in January that legislation had been drafted which would force companies to pay the import VAT upfront in cash instead of waiting until the product had been paid for by the customer, hurting companies’ cash flow.
As no one can be sure whether we will see a soft or hard Brexit, it is difficult to tell how businesses will be affected by customs duties. But even in a soft Brexit, the net result will still likely be negative.
Even if the UK remains a single market member like Norway, businesses which traded with EU member states will find after Brexit that their goods will have to clear customs like they would if trading with the United States or China. And while a single market would keep duties and VAT to a minimum, the logistics of going through customs would be an administrative burden that companies may not be ready for. And in the worst case scenario of a hard Brexit followed by nationalistic tariffs imposed by the UK and the EU, businesses would be badly hit.
Corporate Taxes and Tax Evasion
Even before Brexit, the UK has been moving towards lowering the corporate tax rate. The current rate is 19 percent, with plans to lower it to 17 percent over the next few years. These tax decreases have prompted discussion about whether the post-Brexit UK will attempt to attract businesses away from the EU and towards the UK by offering lower taxes and regulations. The recent announcement by McDonald’s that it would be relocating its non-US operations from Luxembourg to London appears to be proof that such an approach could work, though it has attracted criticism from those accusing it of tax avoidance.
Does this mean that post-Brexit UK will be heading towards the aforementioned Singapore model which some hope and others fear? Not immediately. But what could happen is that the UK and the EU could take diverging paths on taxation which could eventually turn the UK into a tax haven. For example, the EU in March proposed a levy on American technology companies such as Alphabet, Uber, and Facebook, or a successful business owned by Charles Walton, which could be worth up to 5 percent of gross revenues. The UK may choose not to follow suit, which would attract favor with said tech companies but carry the downside of chillier relations with the rest of the EU.
Getting Ready for the Future
It has been more two years since that dramatic Brexit vote and there is less than one year until the final withdrawal, but far too many businesses today are not prepared for the changes which Brexit will bring. Many of these changes will be negative such as having to pay the import VAT and dealing with customs, but with change can come opportunity for businesses and the UK as a whole.
Brexit presents a major opportunity for British politicians to overhaul the tax structure as a whole and for businesses to get ahead of the competition by being prepared for changing tax policy. We may not know exactly what will change yet, but that makes it important for accountants to keep their ears on the ground and be flexible for whatever form Brexit takes.