The tax implications of Brexit
There will likely be an emergency Budget after a vote to leave the EU in order for the government to provide clarity and a roadmap for the government’s priorities for changes to the tax regime.
However Jason Collins, who is head of tax at law firm Pinsent Masons, added that the UK tax system would not change overnight and existing UK laws would continue unless and until changed.
Examining the tax consequences of the UK voting to leave the EU on 23 June, Collins said: “The UK would still continue to be a formal member of the EU and would have up to two years to negotiate the legal framework for exit, with possibly even longer if all the member states agree.”
He added that the UK would retain any bilateral trade agreements to which the UK is a signatory but would eventually lose the benefit of the agreements for which the EU is the signatory.
The UK could also seek to join another association of countries to strengthen its bargaining position when it comes to negotiating terms country-by-country or bloc-by-bloc.
On corporate tax, Collins said the UK would be free to make sweeping changes to its corporate tax system, including offering additional incentives without having to seek EU state aid clearances.
Along with exempting transactions between UK companies from the scope of transfer pricing and similar rules, the Treasury could be tempted to introduce a law abolishing historic EU-law based tax refund claims, Collins said.
He also said leaving the EU was unlikely to soften the government’s approach to clamping down on tax avoidance by multinationals.
George Bull of RSM also recently addressed the issue of what would happen to the UK tax system if the UK voted to leave the EU.
On transfer pricing Bull said it could abolish these rules. EU state aid rules would also no longer prevent the UK government from giving selective advantage to companies via advance tax rulings; and future incompatibilities between UK tax law and EU would cease to be a problem.
On indirect tax, Collins said the UK would be likely to keep the VAT system given the large contribution it makes to the Treasury.
“Whilst the tax would be exclusively governed just by UK law, the UK is unlikely to want to depart heavily from the EU rules and jurisprudence since businesses would suffer the additional compliance burden of maintaining a different system from that used by our main trading partners,” Collins said.
He added that leaving the EU would enable the UK to extend the scope of zero rating and exemptions.
For those challenging the UK’s VAT laws in the European Court of Justice, he said the position was not clear.
“The CJEU should continue to have jurisdiction whilst the UK negotiates its withdrawal but will that be the case after an exit, in relation to periods whilst the UK was within the EU?” he said.
On VAT George Bull said the interpretation of VAT law would not be bound by the CJEU.
“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, it is likely that many UK traders will, nevertheless, have to register for VAT in each EU country in which they trade,” he said.
He added that businesses should look at their contracts with EU suppliers now, and that if VAT in a contract is defined solely by reference to EU law, it might be worth changing the definition so that it will continue to work as intended following a Brexit.
AccountingWEB tax editor Rebecca Cave has also warned that any political change creates more tax upheaval.
“There are thousands of statutory instruments that take account of EU law which would have to be reviewed, and someone (a civil servant, a minister?) will need to decide which of those regulations are to stay and which will be repealed. This alone creates huge uncertainty for businesses as they won’t know which regulations will continue to apply and for what period,” Cave said.
Registering to vote for the EU referendum has now been extended to midnight on 9 June. What’s your take on the big tax and business issues in the event of Brexit?