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The tax implications post-Brexit

24th Jun 2016
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AccountingWEB takes a look at the short, medium and longer-term tax implications of the UK’s break with the European Union.

Following the Leave victory on Friday morning (24 June) and the Prime Minister’s subsequent decision to leave office in October, the government is likely to be in disarray for the next 3-4 months. Politicians and civil servants are trying to regain control of a chaotic situation with no visible long-term plan in place.

A large number of major policy consultations were put on ice during the referendum campaign. With attention diverted to more immediate concerns many of these policy documents may not be released.

Short term

The biggest question mark for accountants hangs over the long-awaited Making Tax Digital consultations - which those in the know were expecting to emerge in the immediate aftermath of a remain vote. But with so much else to contend with in Whitehall, the initiative could well be put on hold until a new Cabinet is in place.

The 2016 Finance Bill is already running behind schedule. And with a Conservative leadership election on the offing, it is entirely possible the Finance Act may not get passed as planned in early October.

“If Osborne clings on as Chancellor there is likely to be an emergency Budget sooner rather than later,” predicted AccountingWEB tax editor Rebecca Cave.

“When Cameron goes, Osborne is likely to go as well – so there will be new Chancellor,” she added. “A new Chancellor will have a new vision of what needs to be done - which equals a Budget.”

However George Bull of RSM said early indications are that there will not be an emergency Budget so soon after the referendum.

He added that the referendum has already held up 40 pieces of tax legislation which will now be reactivated.

“Most of these will come into force between late 2016 and April 2017,” Bull said.

Medium term

During the referendum campaign, the Chancellor collaborated on an illustrative Budget with former chancellor Alastair Darling that anticipated £15bn of tax rises and £15bn spending cuts.

If the emergency Budget follows this path, it will most likely crack the triple tax lock with rises in income tax and national insurance. The measures outlined in the Remain campaign Budget included a 2p rise in the basic rate of income tax, a 3p rise in the higher rate, and a 5% inheritance tax rate to 45p.

To keep companies in the UK who are tempted to leave, the rate of corporation tax will probably not be increased.

Looking to the medium-term, the changes we might see in the tax system revolve around the formal date of exit from the EU.

George Bull said in the period prior to exit, two key principles guide the application of taxes within the UK:

“First, direct taxes. These are imposed by UK law but must be operated in accordance with EU law. Second, VAT. This is both imposed and operated in accordance with EU law. For direct taxes particularly, within these broad constraints 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,” he said.

Long term - the future of VAT

The process of divorce from the EU (under article 50) is likely to start in late 2016 and continue to late 2018, or possibly longer.

In the short to medium term, tax and regulations tied to European law - VAT, for example  - won’t change.

Changes on VAT on domestic fuel were promised by the Leave side, but are unlikely to happen as VAT has been proven to be the most efficient taxes around the world and collects £115bn a year for the UK government.

Ultimately the VAT rate could even go up as it is relatively easy to implement the change.

ICAS director of taxation Charlotte Barbour told AccountingWEB: “One of the key European taxes is VAT and this collects an enormous amount of revenue. It is difficult to see how this could be radically changed in the short term. In the longer term, of course, there will be no need for referrals to the European Court on VAT matters so in time this tax is likely to become a more distinct and bespoke tax in the UK.”

VAT specialist Rhona Graham said the first casualty may be a proposed change in VAT rate from 1 August 2016 on installation of solar panels and other energy-saving things. A CJEU ruling had required that UK put up the VAT rate from 5% to 20% on such supplies, but this change is not in Finance Bill 2016, so may not now happen.

The UK will be free to extend the scope of zero rating and exemptions from VAT without the fear of a referral to CJEU.

Intrastat returns will cease to apply at the point UK leaves the EU; all sales into and from EU countries will be exports and imports, not intra-EU movements, and will be subject to a different VAT treatment; and VAT on expenses incurred in other EU countries may be more difficult to recover.

VAT MOSS will continue to apply to UK businesses selling digital services into EU, but UK businesses will be on a non-EU basis, so the operation of VAT-MOSS is are likely to be more difficult for UK small businesses.

The tour operators margin scheme (TOMS) will not be so easy for UK businesses to operate.

VAT is likely to become more political without the restriction of EU rules, so changes may be introduced in response to pressure groups.This could introduce more complexity to the system rather than simplicity.

After exit George Bull said the UK has had a number of disagreements with the EU over the scope and operation of UK taxes, including patent box, changes to the taxation of controlled foreign companies, differential rates of insurance premium tax and capital duty.

Bull said: “After the UK has ceased to be a member of the EU, 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, Bull said a number of changes are likely around transfer pricing, EU state aid rules, incompatibilities between UK tax law and the EU, and UK tax reliefs, allowances and benefits.

Finally after the UK achieves exit, the government will no longer need to seek European approval in respect of state aid on tax incentives such as R&D tax credits, the patent box, and executive investment schemes (EIS & SEIS), but we may well see more tax incentives introduced to encourage investment in the UK.

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

What do you think are the key short, medium and long-term tax implications of Brexit?

Replies (19)

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By mkowl
27th Jun 2016 12:58

To me the long term implications set out above are only positive outcomes for the UK / England in being able to target tax reliefs in order to stimulate investment.

Whilst we are at it can we have the FRSSE back as well

Thanks (3)
Replying to mkowl:
By jon_griffey
27th Jun 2016 14:32

mkowl wrote:

Whilst we are at it can we have the FRSSE back as well

Lol! I have a feeling that the format of company accounts will be some way down the agenda!

Thanks (0)
John Stokdyk, AccountingWEB head of insight
By John Stokdyk
27th Jun 2016 13:01

George Osborne looks to have shrunk back from his campaign threat to introduce an Emergency Budget of tax cuts and rate increases.

In a statement earlier today designed to quell panic in the financial markets he explained: "Given the delay in triggering Article 50 and the Prime Minister’s decision to hand over to a successor, it is sensible that decisions on what that action should consist of should wait for the OBR to assess the economy in the autumn, and for the new Prime Minister to be in place."

So rather than an Emergency Budget, we're starting to plan for a pretty hefty Autumn Statement instead some time during November.

@mkowl - you're not the only one to express that sentiment about FRSSE - and the international standards convergence project in general. We're researching those aspects for a separate regulatory impact assessment article that will appear shortly. The FRC is playing a very straight bat - like the Chancellor - by assuring everyone that the basic framework in place will continue to apply. But longer term, there are all sorts of potential ramifications.

Thanks (2)
Replying to John Stokdyk:
By mkowl
27th Jun 2016 14:18

The bottom line is you go on any update course on FRS 102A (and I went on an excellent course where John Selwood was the speaker in Milton Keynes a couple of weeks back) and most of my fellow accountants sat there bemused at why the FRSSE is being changed for something far more user unfriendly.

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John Stokdyk, AccountingWEB head of insight
By John Stokdyk
27th Jun 2016 13:13

CIOT tax policy director John Cullinane has also been mulling over the implications, which were published on a blog on the organisation's website. Here's his comment on state aid - with a link below if you want to see the full statement: “The removal of state aid restrictions will create new options for government but just because the option is there to give some firms special treatment does not mean that it is sensible policy to do so.

“A great deal will hang on the relationship we ultimately end up with with the EU. If we end up in an EEA or EFTA-style agreement some of these rules, such as state aid restrictions, may end up being retained.”

Thanks (0)
Replying to John Stokdyk:
By Tom Herbert
27th Jun 2016 13:39

It would have to be an EEA 'style' agreement, as the full version requires freedom of movement. Awkward.

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Replying to TomHerbert:
By mabzden
28th Jun 2016 11:32

I think joining the EFTA/EEA is a good option. The freedom of movement provisions are not the same as the "EU Citizenship" model the EU has introduced.

You can move around the EEA to "accept offers of employment actually made", and this right is "subject to limitations justified on grounds of public policy, public security or public health".

Generally under the EEA agreement national government comes first and nations have far more scope to set their own policies. For example, Iceland (an EFTA/EEA member) unilaterally introduced foreign exchange controls, a very un-EU thing to do.

So if it were down to me I would join the EFTA/EEA tomorrow as I think it's a better fit for the UK than EU membership. Banks would keep their passporting rights to EU countries, and we'd still have access to the single market.

We'd need to contribute to the EU budget but hey ho, you can't have it all. And if things didn't work out longer term we'd have far more time to negotiate a bilateral trade deal with the EU.

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By TheStuartMiller
27th Jun 2016 13:56

I'll be really interested to see how everything begins to unfold with Making Tax Digital and the proposed changes due to be made. One would assume if there is any further hold-up with the changes to the legislation that the April 2018 goal may be altered?

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Replying to TheStuartMiller:
John Stokdyk, AccountingWEB head of insight
By John Stokdyk
27th Jun 2016 14:27

Francois Badenhorst had a chat with Rebecca Benneyworth at a lecture on Friday. She's very closely involved as an adviser to HMRC on the digital strategy and reckoned that the consultation documents for MTD will start to appear as planned very soon.

So while the initiative looks like it's going ahead, she said that the timeline of delivering the first income tax & NIC reporting data by April 2018 is "deeply unrealistic". We've heard similar comments from ATT, ACCA and other professional bodies. It may be hard to get politicians to concentrate on the issue just now, but certainly there will be an opportunity for the profession to make its sentiments about MTD known via the consulting machinery over the next few months.

Thanks (2)
By remhonps
27th Jun 2016 14:20

Getting rid of VAT and evolving into a 21st century "purchase tax" at the end of the sales cycle may be another opportunity to slash costs and the state.

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By Agutter Accounts
27th Jun 2016 14:25

This assumes Britain actually leaves the Single Market. We must wait and see. The situation is so muddled and fluid politically anything can still happen - and probably will.

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By Disabled Campaigner
27th Jun 2016 14:35

A lot depends on who is Chancellor by October, Osborne will have to go as he was a prime architect of project fear, and his lies are already being exposed. Personally the sooner Osborne goes the better as he did more to harm the disabled than any Chancellor in history.

Thanks (1)
By Ian McTernan CTA
27th Jun 2016 15:35

I think we will end up with something similar to that which we have today- but without having to listen to the ECJ and ECHR, and having more flexibility on VAT and other taxes, as well as some limitations on immigration.
It's in no one's interests to terminate the current trading status and so while there will be some tinkering in the end things will looks broadly similar to what we have now on trade.
VAT is the interesting one and we'll wait and see how that pans out.
I guess the doom and gloom the world will end brigade might need to calm down a bit now- or did anyone believe we would need an immediate emergency Budget?

Thanks (1)
By johnjenkins
27th Jun 2016 15:51

After DC's cowardly resignation it was refreshing to hear GO this morning (although I'm not a fan). Although the EU think differently, we are actually in the driving seat when negotiations start. I don't see much change in the tax situation and I certainly don't see much of an Autumn adjustment. Who will Boris appoint? Michael Gove?

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By ireallyshouldknowthisbut
27th Jun 2016 21:46

Seems to me it is far to early to speculate on what might happen to taxes and regulations

There seem to be 3 broad paths:

1. We start the ball rolling and end up with "Europe light" with free trade/free movement/full pay in but no MEP's (ie "norway style")

2. We get a a "no fee, no rules" deal, but this would also mean no free trade. The chances of a "no rules" free trade seems to be very very remote, and seem to exist only in Boris's head given we have nothing to bargain with and Europe are hardly in a mood to be nice about it.

3. The economy really tanks, and article 50 is never enacted and Cameron comes back as the 'saviour' as the least worst option from where we find ourselves in 2 months time once everyone is back from their holidays and experienced a weak £ for themselves on their spending money. Cameron is a master tactician and conditions could really deteriorate inside of 2 months with long running uncertainty.

it seem (2) is much less likely than (1) given the almost even split of opinion on the matter as a country so may be a classic British compromise, and (3) is not entirely unlikely. Cameron has left the door open by not quitting fully and not enacting article 50 this week.

I wont be worrying about it for a few months as the number of unknowns is too varied and liable to make your head explode.

No wonder the markets dont like it.

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By taxbakbristol
01st Jul 2016 02:02

I would have considered the old Purchase Tax a much more efficient way to collect tax.
When I was auditing I was told that 16 Inspectors dealt with the whole of Purchase Tax!
How many people are actually involved now in VAT - at HMR&C and the firms and Individuals submitting at least 4 VAT returns each.
Enormous cost in time.
Bring back Purchase Tax ?
Think outside the envelope!

Thanks (1)
Replying to taxbakbristol:
By Robert Lovell
01st Jul 2016 15:20

Hi Taxbakbristol, what were the main differences between the Purchase Tax and VAT that followed? Interesting it was a tax on sales of "luxury" goods - what might that mean in 2016/17?

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By AnnAccountant
18th Jul 2016 18:29

Everyone seems to be feeling the need to write endless Brexit articles. It's all just speculation.

In any case, in terms of tax there will most likely be more national driven changes by the time we Brexit.

The UK isn't going to implode or shoot itself in the face over this. So everyone should just keep plugging away and making money. Just like you are Robert, but I wish you would all make your dough writing about something else instead

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By AndrewV12
19th Nov 2016 11:53

'the government is likely to be in disarray for the next 3-4 months. Politicians and civil servants are trying to regain control'

Make that 3 -4 years, already talk of additional 30,000 civil servants, what ever they are.

Lets set the Vat threshold at £150,000 and take loads of Small business out of it.

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