Britain’s EU exit and the impact on tax

 

The world of international tax law has the potential to become more complex as Britain prepares to withdraw from the EU. Tim Sarson (Partner, KPMG) examines what organisations need to do to prepare for a tax landscape that’s set to change dramatically.

When the UK finally triggers Article 50 of the Lisbon Treaty it will signal the end of an extensive negotiation process, with a lot of it done privately. What we do know for sure is that tax – the core component of any trading relationship – is going to be on the table and up for discussion.

 

Preparing to meet new rules

So what can British businesses expect? Will the UK and its EU trading partners rip up the rulebook and start afresh? Or can we expect a continuation of the same regulations?

According to international tax specialist, Tim Sarson, it all depends on the type of tax.

For starters, Tim explains, indirect tax is an EU tax. “The rules and jurisprudence of indirect tax, which includes VAT and customs duty, are written and maintained at EU level. The way transactions are treated differs depending on whether they are intra-EU or go outside the union. That means that while we remain in the EU, we must retain a certain way of doing things. But as soon as we leave, it will mean massive change.”

Corporate tax, on the other hand, is not EU law although it is subject to a number of EU directives. But that means each member state has been free to set its own tax laws. Therefore, when the UK officially leaves the EU, corporate tax arrangements shouldn’t fundamentally change.

The key question

So, should UK companies sit and wait to see what transpires around business taxes, or take steps now to prepare for new rules and regulations? Tim believes the answer depends on how quickly they can adapt to change.

“If there's one thing that's certain about the EU referendum, it’s that it will increase paperwork and red tape,” he warns. Companies will be “spitting out paperwork”, preparing customs declarations, changing the way their invoices look, and potentially re-routing supply chains to deal with tariff or regulatory issues. “These sorts of things can’t be achieved in two weeks after the final deal announcement. Companies that know there’s going to be a significant change to what they need to do ought to be scenario planning now.” This will depend to a degree on company size and complexity, but waiting until the last minute might leave you non-compliant on day one because you haven't got the right systems in place.

Despite this, there are some areas where a watching brief is more appropriate. One such area concerns the holding structure of the business. According to Tim, there are two key reasons to wait. “The first is partly dependent on what trade deals the government negotiates. They might, for example, start renegotiating a bilateral treaty to give us zero withholding tax with, say, Germany,” he explains. “Restructuring on the basis of a worst-case scenario only to find it was unnecessary is obviously a waste of money. The second is that it’s quicker to restructure legal entities than to change the overall operating model.”

“While we remain in the EU, we must retain a certain way of doing things. As soon as we leave, it will mean a massive change.”

The choices facing the UK

“On day one of the UK’s exit from the EU, VAT and customs are likely to retain identical legislation, simply because there are other issues to contend with,” says Tim. “But the UK will have a choice to make as to whether it wants to follow EU rules closely, particularly as the Organisation for Economic Co-operation and Development (OECD) already lays down certain guidelines around the need for countries to have similarity in their tax legislation.”

However, he adds that the UK Treasury and HMRC could choose to let the UK diverge in certain respects where previously, as an EU member, it did not have that option. But with many customs duty rules based on World Trade Organisation (WTO) guidelines, “the UK will still not have total freedom over legislation and tax treatments, even if in some areas the Government might be looking to choose certain liberalising or tax-cutting measures that help mitigate the Brexit impact”.

“Companies that know there’s going to be a significant change to what they need to do ought to be scenario planning now.”

Who will feel the impact?

In terms of where changes will have the greatest impact on corporate tax, all that can be offered is speculation, says Tim. “But there is still informed speculation.” It is, he adds, “important to get informed and to understand, even just politically, what is the worst-case scenario, and for businesses to then understand what that scenario means for them”.

The rooted: For those businesses rooted in the UK, there are few options. “There’s little these businesses can do about the EU referendum result other than adapt to it. The issues that these type of businesses are facing are typically more about labour availability, foreign exchange rate movements if they’re importing into the UK and the general fiscal environment. It’s less about cross-border trade.”

The mobile: “Certain other businesses, such as many tech companies, are fundamentally mobile,” says Tim. “They choose to be in the UK but can flip from country to country.” They won’t necessarily be badly affected by the EU referendum result, he adds, because they have less financial and emotional investment in the UK. “These may well be the companies that vote with their feet if the post-exit tax landscape is not to their liking.”

The interconnected: It is multi-national businesses that have an integrated international supply chain – such as pharmaceutical or automotive groups that have most to lose. “These companies have the worst of both worlds because they will be heavily invested in the UK but their supply chains will be disrupted because the EU referendum result places a cross-border tax barrier in the way where there wasn’t one before.” These companies often have international workforces, and will often use intermediate products that carry customs duty. “These are the ones that face the biggest EU-exit impact.”

All in all, the message is clear, planning is key. Businesses must have their tax scenarios mapped out and be ready to act when Article 50 is triggered. Failure to do so could make a complex situation even more difficult, and potentially disastrous.

Useful links

Our specialist teams can provide support that’s tailored to your sector. For more information, visit
http://commercialbanking.lloydsbank.com/specialist-teams/

Take a closer look at alternative models of taxation that the UK could consider post EU exit at https://home.kpmg.com/uk/en/home/insights/2016/09/impact-of-brexit-on-tax.html

 

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