It seems an age since the UK voted to leave the EU but, with exit talks still to begin, it will be much longer before we really know the effects of the referendum result. There will, of course, be significant long term economic consequences and many areas of law will need to be adapted, but what are the possible tax consequences of Brexit for the UK?
An important point to note is that the UK has been free to make its own decisions on many areas of taxation, such as personal and corporate tax rates. However, it is the ‘perceived’ financial effects of an exit from the EU that may indirectly affect the rates set by our politicians. We expect such issues to be addressed in the Chancellor’s Autumn Statement on 23rd November.
Freedom to set business relief rates
Business tax reliefs, such as R&D tax credits for SMEs, are currently constrained by EU State Aid rules. In the post-EU era, the UK will have freedom to amend these reliefs.
The end of VAT as we know it
VAT may be the area where we see greatest change.
The harmonisation of VAT is a central principle of the EU, seen as essential to the achievement of a single market. Whilst, in theory, the UK could decide to replace VAT with a sales tax on goods and services, it’s extremely unlikely. It is more likely that UK VAT law will become independent of EU law. UK legislation currently enacts EU law; this legislation could be amended so that different rates could apply to goods and services with no constraints from the EU.
VAT on exports and imports
There will inevitably be changes to how businesses export and import goods to and from EU businesses post Brexit.
As an example:
Under current VAT rules, when a UK business buys goods from EU businesses it makes an ‘acquisition’. No VAT is payable on the transaction unless the UK business makes exempt supplies.
After we exit the EU, the same transaction will most likely be treated as an ‘import’. Therefore, Import VAT would be paid to HMRC at the time of importation.
The importing business would then reclaim this from HMRC on the next VAT return (unless the business makes exempt supplies). This change will potentially result in issues with cash flow for importing businesses.
Here to help
The extent of the changes to tax will depend on the UK/EU exit negotiations and whatever system is adopted for trade. Be assured, we are watching all developments closely. We will keep you informed of any changes that may affect you and your business and are here to help you manage the opportunities and threats that may arise in the coming years.