Brexit to have 'profound impact' on UK tax
Leaving the European Union is set to have a profound impact on tax in the UK, but change is likely to be gradual and long-term, because EU law is so embedded in UK tax legislation.
That was one of the key messages from an Edinburgh Tax Network event on “Brexit and Tax”, hosted in association with Terra Firma Tax Chambers at the headquarters of ICAS last week.
Speaking at the event were Isobel d’Inverno, director of corporate tax at Brodies LLP, and Darren Mellor-Clark, tax partner and head of indirect tax in the City with Pinsent Masons. The event was chaired by Derek Francis, advocate with Terra Firma Chambers and a barrister with Temple Tax Chambers.
As well as the challenges posed by Brexit, d’Inverno and Mellor-Clark agreed, in the long term it offers the flexibility for potentially radical changes, such as different regional rates for corporation tax and VAT, and greater leeway to apply “state aid” through tax concessions.
Direct tax and Brexit
Isobel d’Inverno observed: “Nothing has changed at all… yet.”
She added that, as most of the EU legislation affecting direct taxes had been enacted as part of UK law, any change following Brexit is likely to be incremental.
There could be some impact on companies operating on a cross-border basis. Under the principle of freedom of movement of capital, EU directives currently provide protection against tax charges on intra-group dividends or royalties, for example.
The UK government might also be able to overturn the ruling – made in the case of Marks & Spencer – that multinational groups should be permitted to offset losses from subsidiaries in other member states against UK taxable profits.
The tax avoidance agenda may become “less complex”, d’Inverno said, as the UK would not have to reconcile the OECD’s Base Erosion and Profit Shifting (BEPS) initiative with the EU’s own tax avoidance programme.
There might also, in the long run, be more flexibility to introduce wide-ranging tax reforms, such as different regional rates of corporation tax – as already pioneered in Northern Ireland – within the UK. Separate regional VAT rates or local sales taxes might also be applied.
There might also be more scope for flexibility in using the tax system to support business, d’Inverno said. Measures such as the enterprise investment scheme, the patent box and R&D tax credits are currently subject to restrictions as a result of the EU’s state aid rules.
VAT: A European tax but here to stay?
Darren Mellor-Clark pointed out that, although VAT is a “European tax”, since it brings in more than £100bn for the UK government it is likely to continue, in some shape or form.
VAT is also likely to continue to be influenced by EU law even after Brexit, he added, just as Switzerland’s VAT regime is.
One of the big questions concerns the VAT treatment of goods and services across borders. Currently, for example, under the MOSS system, companies providing services to customers across a number of countries need only register and pay VAT in one – that may not be able to continue for UK-based businesses.
Mellor-Clark added that there was a question as to whether HMRC is adequately resourced to deal with Brexit as well as ‘business as usual’ VAT matters.
As he pointed out, EU law is still the law in the UK and UK courts are still referring matters to the Court of Justice of the European Union (CJEU). He said: “It is uncertain when EU law will stop being effective. UK legislation could curtail it and any exit deal could include the extension of EU law for a prolonged period. The influence of EU law case law is likely to be felt for a long time.”
Mellor-Clark warned, however: “The transition from the EU basis of VAT is likely to be a gradual drift, but the impact on compliance systems and processes will be significant. Companies’ systems will require a major overhaul.”