The referendum vote in itself did not give rise to any immediate tax changes, or any change in tax policy. However, depending on the deal reached with the EU for the UK's departure, there are likely to be some significant changes in the years ahead. It is hoped that business is made aware of the likely terms of the deal with the EU early on in the formal negotiations, to afford maximum time to plan ahead for any necessary changes to business models and changes to systems.
Key direct tax issues
- Direct taxes are governed by UK law, but must comply with EU Treaties and CJEU case law. The EU treaties authorise the EU Council to issue directions, regulations and provisions, which following Brexit may no longer apply to the UK, such as the Mergers Directive, the Parent Subsidiary Directive, the Interest and Royalties Directive, the Mutual Assistance Directive and the Recovery Assistance Directive. Some corporate structures may be relying on the Parent-Subsidiary Directive and the Interest and Royalties Directive to avoid the incidence of withholding tax, where the relevant double tax treaty does not provide a complete exemption, and this should be checked.
- The UK has had to comply with the four fundamental treaty freedoms, the freedom to provide services, the freedom of movement of people, the freedom of capital and the freedom of establishment. Loss of EU passport rights, and loss of the freedom to provide services, may mean that some businesses need to maintain a place of operation in the EU.
- It is uncertain what status EU case law and ongoing reference to the CJEU will have following Brexit.
- The EU Commission has been pushing for full harmonisation of corporate tax, through the introduction of a Common Consolidated Corporate Tax Base (CCCTB) and, more recently, through a uniform response to the recommendations made by the OECD in its BEPS reports. While the UK has been, and is likely to remain, a supporter of the BEPS recommendations, it has been an opponent of the CCCTB, so Brexit may accelerate the CCCTB's introduction.
Key indirect tax issues
- A movement of goods between the UK and the rest of the EU will become an import/export, with increased compliance obligations and potentially customs duties. Currently, duties are entirely governed by EU Directives and Regulations and rates of duty are set at an EU level. All EU Member States share common external tariffs with third countries. The UK will need to enact its own legislation, but could mirror the EU Directives and Regulations, including the new Union Customs Code, effective 1 May 2016. The UK may negotiate a free trade agreement with the EU resulting in no or very low levels of customs duties. Agreement will need to be reached on issues such as preferential tariff rates, non-tariff barriers such as health, safety and environment standards, and rules of origin requirements.
- Movements of goods between the UK and the rest of the EU will become imports and exports for VAT purposes with generally more complex compliance obligations than the current intra-EU system. UK businesses will no longer need to adhere to compliance obligations for intra EU trade (EU Sales Lists and Intrastat).
- There will be an impact for intra EU VAT accounting such as the B2C distance selling, the mini one stop shop for electronically supplied services, triangulation and possibly changes for the tour operator's margin scheme.
- There will need to be changes to the systems dealing with input VAT claims. EU businesses will need to use the 13th Directive Reclaim Scheme to reclaim UK input VAT, rather than the modernised paperless electronic version, under the Reclaim Directive. The UK are likely to introduce an equivalent system to assist UK businesses to recover EU VAT.
- The UK will be able to more easily introduce new reduced VAT rates and zero-rating for charities and other sectors, where socially desirable, and clarify VAT exemptions e.g. for payment services, outsourcing for financial services and management of special investment funds.
- No changes are expected to Air Passenger Duty, Climate Change Levy and Aggregates Levy, which are bound by UK law.
- Keep abreast of likely changes impacting your business.
- Check your corporate structure will not be affected by any dividend or interest withholding taxes, and be prepared to take action to avoid loss of EU passporting rights.
- Planning and resources may be required to implement changes within ERP Systems and compliance processes, especially for VAT compliance.
For a more detailed analysis of the issues, please contact Richard Woolich, Head of UK Tax, or your usual DLA Piper contact.