23 March 2018
On Brexit the UK will stand outside the existing EU customs union with all the other EU Member States. Unless an alternative arrangement is negotiated exports of goods to EU countries will become liable to EU customs duties and import VAT in the destination state. Imports of goods from the EU to the UK would likewise become liable to VAT and duties. Also the UK would have no access to any preferential terms of export existing between the EU and third countries outside the EU.
Whilst the UK as a non-EU Member State has no obligation to maintain a VAT system, its abolition is impossible to envisage as it is responsible for 18% of all UK tax revenue. However, future decisions on VAT by the European Court would cease to be binding on the UK interpretation of VAT. There would be more flexibility in applying zero-rates and exemptions. The minimum rate of 15% under EU law is currently fixed at 15% which restriction would no longer apply after Brexit.
As a practical matter VAT compliance obligations for many businesses would be increased. Supplies across Europe would be more complex as the current 'one stop shop' arrangements would end and a business would need to register in every member state in which it did business rather than in a just a single member state.
Whilst direct taxes are within the competence of each member state, direct tax rules are still required to comply with EU legal principles such as freedom of establishment. UK direct tax rules on group relief and transfer pricing have been changed to fit in with these principles. Further such changes will now be unnecessary. Also, pressure by the EU to move towards a common consolidated corporate tax basis on which corporate profits would be assessed will no longer be relevant to the UK.
In practice many of the amendments made to the UK tax code resulting from EU membership have been measures that are positive for business and supported the objective of making the UK the most attractive place to do business in the G20. It seems unlikely that any government would wish to do anything that made significant changes to the UK's business friendly image combined with a low corporation tax rate (20% to become 17% by 1st April 2020).
The EU Parent/Subsidiary Directive and the Interest and Royalties Directive will cease to apply on exit. This has potentially serious implications because it could make the UK a far less attractive holding company location. Dividends, interest and royalties paid up to the UK by an associated company in another member state (or Switzerland) may now be subject to withholding tax in the source state. In many cases it will be possible to rely on a double taxation agreement between the source state and the UK to eliminate or reduce any withholding taxes but this will not always be the case. For example, dividends paid by a wholly owned German subsidiary to a UK parent company could currently be paid without withholding tax using the Parent/Subsidiary Directive. However, on Brexit such dividends will be liable to withholding tax of 5%.
The UK itself does not under its domestic law impose withholding taxes on outbound dividends so in this context Brexit is irrelevant. However, a 20% withholding tax does apply to interest and to some royalties. Again a double taxation agreement (of which the UK has a large network) may help the position but in some cases there will be real negative consequences. For example, a UK subsidiary paying interest to a Cypriot parent company will be required to withholding tax from interest at the rate of 10% as the interest article in the agreement between the UK and Cyprus only reduces withholding tax from 20% to 10%.
The UK would be free to impose capital duty in new share issues and increase stamp duty charges in the issue of shares to depositaries. However, such changes seem in practice very unlikely to occur.
This relates not only to tax. However, in the tax sphere the state aid rules have prevented the UK providing benefits that give an advantage to UK residents over non-residents thereby giving a competitive advantage to such residents over residents of other EU member states.
This Directive allows cross-border reorganisations for companies operating in the EU enabling taxes to be deferred. The Directive is already enshrined in UK law and is unlikely to be changed immediately. However, there would be nothing to stop the UK making changes in the future.
Social Security contributions
Following Brexit the existing rules under which UK workers employed to work in another EU member state are only required to pay contributions in on member state. Following Brexit these rules will not apply thereby potentially generating a double charge to contributions which in practice would be passed back to employers to satisfy.