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Post-Brexit taxation: less of a certainty?

18 July 16

While many taxes may be little affected by a UK withdrawal from the European Union, the outlook for VAT is more open to doubt

by Christine Yuill

According to the famous quote attributed to Mark Twain, the only certainties in life are death and taxes. However, what effect the UK leaving the EU will have in relation to taxation is one of a number of very real uncertainties faced by the country in the light of the recent referendum result.

Given that at the time of writing, everything in the post-Brexit world appears to be up in the air, with very little known about any plan (or apparent lack thereof) and no real precedent for a country leaving the EU, any commentary at this stage can only be speculation.

Will anything change?

In fact, it may be that the Brexit arrangements that are eventually negotiated mean that the UK remains within the European Economic Area (EEA) or European Free Trade Area (EFTA), and so will continue to be bound by existing EU directives. If that is the case, Brexit is unlikely to have substantial tax implications.

Even if the UK operates outside of the EEA or EFTA, a UK exit is unlikely to have any major implications on the way direct taxes operate, which, subject to not discriminating against EU nationals and complying with the fundamental freedoms in EU law (such as freedom of establishment), are based on domestic rather than EU law.

Corporation tax down, rises elsewhere?

In the immediate aftermath of the Brexit result, Chancellor George Osborne warned of expected tax rises coupled with spending cuts. However, in a move to encourage businesses to continue to invest in the UK, he pledged to cut corporation tax to 15%, 5% lower than the current rate of 20%. A 15% rate would give the UK the lowest rate of corporation tax of any major economy. The Chancellor had previously announced in his March Budget that corporation tax would be reduced to 17% by 2020.

It is likely that any other tax changes would be introduced in an Emergency Budget which the next Prime Minister may choose to hold. Any decision to raise income tax or other taxes will need to be carefully considered in light of the uncertainty Brexit has created and so as not to prevent businesses from investing in the UK. The next Prime Minister will want to ensure that the UK remains “open for business”.

Value added tax

VAT has the largest European dimension of any tax, with its legislation finding its source in the Principal VAT Directive and assorted regulations. Leaving the EU would mean that the UK would no longer be obliged to maintain a system of VAT, but abolition is unlikely due to the significant revenues it raises.

In terms of any post-Brexit independent VAT replacement tax, it seems unlikely that the UK would wish to start with a transaction tax that looks radically different to the EU bloc on its doorstep. At least in the early years, it seems probable that there would be large similarity to EU VAT, although perhaps over time the taxes will drift apart in some of their provisions.

Even following exit, VAT cases will be decided by reference to the law in force at the time of the matters in dispute. Given the slow progress of tax cases through the UK legal system, the UK courts could be applying EU principles well into the 2020s. However, it cannot be completely discounted that Parliament may pass a statutory limit on the period in which EU law must be considered on a retrospective basis.

Generally, leaving the EU will give HMRC the opportunity to reconsider its operation and policy in relation to VAT. In particular it is likely increasingly to marginalise or ignore EU jurisprudence it dislikes, and apply more vigorously its own view that, previously, was curtailed by application of EU law. The UK could decide to give tax incentives to selected regions or sectors, if it no longer has to comply with EU state aid rules. Post-Brexit, there could therefore be an opportunity to lobby for exemptions and reliefs from VAT that would benefit UK business. The Government will need to work out how supplies to those established in EU countries will be treated, as this could impact on VAT recovery for financial services companies and other UK businesses.

Subject to discussions

As with every other post-Brexit decision, it remains to be seen what will happen in relation to taxes. Given the uncertainty that Brexit poses for the UK economy, it may be that tax is indeed a certainty and that, at least in the short term, there may be no significant changes in this area, but it all very much depends on the outcome of the negotiations, which are likely to take some time.

Christine Yuill, senior associate, Pinsent Masons LLP

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