So what happens if we leave the EU from a tax perspective? This is a very difficult question to answer without knowing the precise terms of any agreement between the UK and the EU. Currently the EU is saying that it won’t enter into informal negotiations and the key players in ‘Brexit’ are saying that they want to agree terms before enacting clause 50 of the Lisbon Treaty which will formally swing things into motion. This is quite an interesting stalemate.
Various tax ramifications that spring to mind are as follows:
Currently interest, royalties and dividends can be paid between EU member states without suffering withholding tax at source. The Parent-Subsidiary Directive eliminates withholding tax on dividends paid between associated companies within the EU and the Interest and Royalties Directive eliminates withholding tax on interest and royalty payments between associated enterprises within the EU. The removal of these directives are unlikely to have much impact as it is likely that the position could be re-established either through amending UK domestic legislation or renegotiating the terms of tax treaties.
There has been constant pressure on the UK to make tax laws which are EU compliant and a few key pieces of UK anti-avoidance law have been amended on this basis. For example it is now generally accepted that in certain circumstances a UK resident individual should be able to operate through a Maltese company which can have effective tax rates of 5% – without facing UK anti-avoidance legislation which exposes the individual to tax on the company’s profits. It remains to be seen whether the UK would use Brexit as an opportunity to amend domestic laws so as to discourage the operation of businesses in certain EU jurisdictions. Perhaps this is unlikely on the basis that there will be more than enough to do without getting into this kind of minutiae. Also any attempt to change these kinds of rules would be at odds with the objective of making the UK an attractive place to base holding companies.
Although there is a good chance that importers of UK products will face custom duty costs (compared to the current rate of nil) it is also possible that these will be mitigated to nil through a free trade agreement – although this is of course hugely up in the air at the moment.
Without EU state aid rules to consider, there would be more freedom for the UK to implement measures to attract inward investment. For example EU rules has placed restrictions on EIS and VCT relief over the last few years. Recent restrictions include limiting the amount that a company can raise through EIS and also reducing the age of a company that can qualify to seven years. Certain EU constraints would also be lifted in respect of such incentives as research and development tax credits and EMI options. In considering whether to take advantage of these freedoms, the government would have to keep a careful balance between maximizing the attractiveness of the UK in a post-Brexit world and protecting tax revenues.
It is also likely that the planned decrease in corporation tax rates to 17% will be accelerated so as to ‘sugar-coat’ the UK as a place to do business post-Brexit.
What will actually happen? Who knows? Despite the referendum vote it is far from certain that Brexit will actually happen as it is difficult to clearly envisage the chain of events that will lead to the (critical) invoking of clause 50 of the Lisbon Treaty. Watch this space as we live history………
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