At this stage, we cannot predict with any certainty the full tax impact arising from the UK’s exit from the EU.
What is clear, is there are mixed reactions from businesses. Some global groups have put on hold plans to incorporate UK subsidiaries; EU parent companies may be preferred for new EU subsidiaries, rather than a UK parent; while others are taking advantage of the weakened UK sterling exchange rate fluctuations.
There is no immediate impact of the decision on the UK tax regime. However, there are a few key areas that many businesses will be waiting patiently to obtain clarity on, when the UK eventually leaves the EU.
The biggest impact is expected to be in respect of VAT and Customs Duties.
It is likely that initially UK VAT will be very similar to EU VAT, but changes can be expected over time. Movements of goods between the UK and EU will be treated as imports and exports, resulting in changes to systems and this will no doubt create increased compliance burdens, but no additional VAT cost should be suffered.
It is also likely that UK Customs legislation will be similar to EU legislation, at least initially, but agreement will be needed as to what tariffs will apply between the UK and EU, if any.
Withdrawal of the benefit of the EU directives, could result in withholding tax being applied to interest, royalties or dividends. Review of domestic legislation will be required for each country, to ascertain if additional tax burdens arise and confirm whether a Double Tax Treaty with the UK provides exemption or reduction in rates. For example, under UK law, a 20% withholding tax applies to Patent Royalty payments made to non-UK resident companies. In the case of payments to a Luxembourg company, this withholding tax is reduced to 5% under the UK/Luxembourg double tax treaty, not eliminated.
Certain beneficial tax treatments may apply to EU residents in many EU states’ domestic legislation, but this may not apply to UK residents post Brexit. An example would be the French Controlled Foreign Company legislation and this may need to be considered in the future, given the proposed reduction in the UK CT rate.
Corporate mergers or reorganisations involving EU transactions, may result in immediate tax liabilities, whereas previously, deferral under EU legislation may have been available.
EU regulations regarding employees’ movements in the EU would no longer apply to the UK, unless special arrangements are made. New bilateral social security agreements may be required between the UK and each EU state.
Businesses must therefore wait for new rules to be put in place to manage these issues and, in the meantime, review current and planned EU transactions to assess whether additional tax liabilities may arise post Brexit.
Linda Kidd is a Tax Senior Manager at Anderson Anderson & Brown LLP, Chartered Accountants.