As we await the outcome of discussions between the UK and EU member states our specialists have analysed the potential ramifications of a departure from the EU, depending upon whether or not Theresa May and the Government reach any agreement with the EU.
This is not a comprehensive overview but highlights some of the potential changes that could affect the UK’s tax system. Some possible practical tax implications are also noted, though this is not intended to be a full note of all possible tax implications.
In the attached PDF, we set out an analysis of a number of direct tax areas, for each one looking at:
The direct tax areas considered are:
A fourth scenario, not covered above, is the possibility of the UK negotiating a bilateral treaty with the EU in a similar fashion to those negotiated by Canada and Switzerland. However the tax issues from such a bilateral treaty would depend on the terms of the treaty. The examples of Canada and Switzerland appear to indicate that EU rules would need to be adopted in exchange for market access, so that tax issues in relation to areas covered by such a treaty might be similar in some ways to the position of an EEA country.
Summary of WTO rules that could apply to influence how the UK applies tax measures were it to leave the EU/EEA:
Application of these WTO rules in relation to tax may be affected by double tax agreements and whether tax systems of the UK or other jurisdictions are capital export neutral or capital import neutral.
The UK would almost certainly retain its VAT system in some form: the UK collected £111bn from VAT in 2014/15, around 23% of total revenues.
However, the VAT regime is currently strictly governed by EU directives (as explained above), and the UK will be both required and free to make changes to its VAT regime in the future. Changes will be needed to address the fact that, in the near future, the UK will no longer be an EU member. For example, by definition ‘intra-community supplies’ will simply no longer exist for the UK. On the other hand, the UK will be free to set its own rules. Realistically, this freedom will be restricted by practical considerations and international agreements other than EU rules, but potential domestic changes would include the applicable VAT rates and exemptions.
As we are expecting a negotiation period of at least two years before Brexit can be completed, immediate changes to the UK VAT regime are unlikely. However, there will no doubt be many proposals, opinions and much speculation and we will produce regular updates to support your business and help you prepare for these changes.
Customs duty is an EU tax imposed by EU regulations. Customs duty is charged on the import of all goods into the customs territory of the EC when those goods are released for free circulation. It is charged on import and collected by the Member State into which the goods are imported. In the UK customs receipts currently amount to around £3bn annually, around 0.6% of total revenues.
EFTA states are not part of the EU customs union, additional duties and tariffs may be applied by EFTA countries for goods imported from outside their borders. EU countries are not permitted to set their own customs tariffs - this must be done only by EU-wide agreement. www.conformance.co.uk/info/eea.php
However EFTA members are required to comply with the principle of freedom of movement of goods. www.efta.int/media/publications/fact-sheets/EEA-factsheets/GoodsFactSheet.pdf
On leaving, EU customs duty would no longer apply. This would mean that the UK would lose revenue from collection of EU customs duty. Customs duties would be charged on the export of goods from the UK to the EU.
However, the UK would no doubt enter into some form of agreement with the EU (and if necessary the EEA) on customs duties. In any case it would no doubt be bound by WTO rules. Thus in practice Brexit may make little difference for customs duties, other than require changes to compliance procedures.
EU – European Union: an economic and political union between 28 countries who are Austria, Belgium, Bulgaria, Croatia, Republic of Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden and the UK.
EEA – European Economic Area: the EEA is an Internal Market governed by the same basic rules and is made up of the 28 EU countries and Iceland, Liechtenstein and Norway.
EFTA – European Free Trade Association: an intergovernmental organisation set up for the promotion of free trade and economic integration to the benefit of its four Member States: Iceland, Liechtenstein, Norway, and Switzerland. While Switzerland is neither an EU nor EEA member it can access the single market - so Swiss nationals have the same rights to live and work in the UK as other EEA nationals.
CJEU – The Court of Justice of the European Union.
TFEU – Consolidated treaty on the functioning of the EU.
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