This article is extracted from Smith & Williamson (updated September 2016)
This document summarises some of the potential implications for the UK tax system of possible changes following the vote on 23 June to leave the EU. Some possible practical tax implications are also noted, though this is not intended to be a comprehensive note of all possible tax implications. Please get in touch with a member of the Smith & Williamson tax team for further discussion of the possible tax implications of the outcome for you and your business interests.
|Current Position||Future Downgrade Membership to one of the EEA and not full EU Membership||Exit EU Altogether|
|Supremacy of EU/EEA law over UK law||EU law takes precedenceover UK law. Any UK law which introduces EU law must be interpreted in the light of the wording of EU law.|
There is recourse to EU Courts (CJEU) to challenge the application of national law by other member states.
|EEA agreement only provides for a system that promotes the implementation of EU law into EEA law. While there is no direct permission to rely on EEA law when national law conflicts with it, EEA members are obliged to consider EEA law (whether implemented in national law or not) when interpreting national law. However, the UK could still be liable if it had not fully implemented EEA law.|
Recourse would be available to the EFTA Court to challenge the application of national law by other EEA member states.
|The UK would not be subject to the constraints of EU/EEA law, though such law may be taken into account. EU law would probably still be relevant for disputes relating to the periods prior to the UK’s exit.|
There would be no recourse to EU/EFTA courts should the UK find that other EEA country rules had an adverse impact on the UK in an unfair manner.
|Impact of EU/EEA Law on Direct Tax||Four fundamental freedoms have influence on direct tax: free movement of goods, services, persons and capital. Most relevant provisions are:|
Freedom of establishment, free movement of capital, non-discrimination and restriction on state aid.
|Similar principles to those applicable for EU law apply to EEA law.||There would be no requirement to comply with EU law. However the UK would probably be required to comply with World Trade Organisation rules (see below).|
There may be some scope for the UK to widen its tax incentives to SMEs without the constraints imposed by State Aid Rules.
|EU Directives:||Seeks to ensure cross border intra-EU company reorganisations within scope are tax neutral. Company needs to have:|
There are other requirements. Exit taxes are not prohibited by the mergers directive, but a choice of immediate or deferred payment must be offered.
|It may be possible for the UK to achieve the advantages of the merger directive as a member of the EEA (or EFTA) provided the other state has tax neutral re-organisation provisions for purely domestic exchanges of shares, and that this does not give rise to taxation of unrealised capital gains and tax-free reserves.|
Regarding exit taxes, it is likely that a choice of immediate or deferred payment would be required to be offered to comply with the EEA agreement, subject to the local law of the relevant jurisdiction.
|The EU/EEA requirements of the mergers directive and principles on exit taxes would no longer be mandatory.|
The UK may wish to keep some or all of these principles in effect to continue to make location in the UK attractive to business, though application is likely to depend on double tax treaties.
|EU Directives:||Where conditions are met, the directive eliminates withholding taxes on cross border intra-EU interest and royalty transactions||All cross border intra EEA payments of interest and royalties would be outside the scope of the directive, and would not be protected by fundamental freedoms of the EEA agreement.|
Obligations on withholding tax would depend on double tax treaties.In the absence of specific post-Brexit arrangements, any EU Member State could reintroduce withholding tax for interest payments by its own resident companies to group companies resident in the UK. In such case, the only way for the UK to maintain (from the viewpoint of group companies) the attractiveness of exclusive taxation would be to grant a unilateral exemption for incoming foreign interest payments.
|The interest and royalties directive would not apply. Obligations on withholding tax would depend on double tax treaties.|
|EU Directives:||Where conditions are met, this prevents EU member states charging indirect tax on companies raising capital.|
As a result of this directive HMRC no longer seeks to impose the 1.5% SDRT on issues of shares and securities to depository receipt issuers and clearance services in certain circumstances.
|The capital duties directive would not apply.|
Subject to complying with the principle of freedom of movement of capital the UK could re-impose the 1.5% SDRT that it currently does not impose.
|The capital duties directive would not apply.|
Subject to complying with WTO principles the UK could re-impose the 1.5% SDRT that it currently does not impose.
|Social Security Agreements||The EU is a signatory to the EU social security agreements which means workers who move within the EU are only subject to social security of onecurrent position.||EU social security agreements apply to EEA member states.||Other non-EU countries have signed the EU social security agreement as a non-member (Switzerland has done this), so the UK may wish to apply for this should it leave the EU altogether.|
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:
i. Most Favoured Nation (MFN) treatment – so that there is no discrimination between trading partners’ goods; and
ii. National Treatment (NT) so that domestic taxes and charges should not be applied so as to afford protection to domestic production
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 are aiming to update you on the VAT developments on a monthly basis 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. http://www.conformance.co.uk/info/eea.php
However, EFTA members are required to comply with the principle of freedom of movement of goods. http://www.efta.int/media/publications/fact-sheets/EEA-factsheets/GoodsFactSheet.pdf
On leaving the EU, 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 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 Membre 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