Now that Article 50 has been triggered what are the implications for the UK’s direct taxes? UK direct taxes, unlike VAT, are purely governed by domestic law not EU law, apart from the requirement not to discriminate against other EU nationals and to comply with the fundamental freedoms and state aid regulations. If the UK were to leave the EU but join the European Economic Area (EEA) it would still need to comply in these areas. However, the UK joining the EEA looks less and less likely as the direction appears to be toward a hard Brexit.
The government will wish for Britain to appear to be open for business, suggesting a tax system that supports and encourages UK inward investment and entrepreneurship. The UK already has a competitive corporation tax rate at 19% (reducing to 17% on 1 April 2020) much lower than most other Organisation for Economic Co-operation and Development (OECD) countries.
If the UK were no longer required to meet the state aid rules this would allow the UK government to be more generous with tax reliefs for investors. For example, the scope of tax relief under the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS) could be wider than at present. Whether or not the UK government will take this opportunity remains to be seen.
The EU freedoms have meant the UK tax authorities have not always been able to implement anti-avoidance rules against international persons and organisations in the way that they would wish. They have had to restrict their Controlled Foreign Companies legislation, for example. Brexit could enable them to implement that legislation in the way that they would have originally preferred. We wait to see if they will do so.
Following Brexit, the EU Parent-Subsidiary and Interest and Royalties Directives will no longer apply. These directives allow dividends, interest and royalties to be paid between companies within the EU without, usually, withholding tax. The UK does however have double tax treaties with all of the EU members so most payments will still be able to be paid gross but there will be exceptions (e.g. dividends paid to the UK by a German subsidiary).
It is unlikely that Brexit will have any significant impact on the UK’s implementation of BEPS (Base Erosion and Profit Shifting) a general anti-avoidance provision being implemented internationally. The UK is bound by its commitment as a member of the G20 and the OECD and has already introduced restrictions on interest deductibility for large companies and groups.
The European Commission’s Anti-Tax Avoidance Directive is intended to implement certain BEPS recommendations within the EU including country-by-country reporting. Members have until 31 December 2018 and the UK is likely to have implemented the proposals before Brexit.
In summary Brexit is unlikely to have any significant impact on UK direct taxation in the short or medium term but in the long term it will give greater flexibility to the UK government on the legislation it implements.
If you would like to discuss this further please get in touch with me or another member of the Corporate and Business Tax team.
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