ICAS Brexit answers: Taxation and accounting
The ICAS Technical Team set out 20 Questions for the UK Government following the Brexit vote on 23 June. In a series of articles, the team now attempts to provide some answers to those questions - and provide additional context and background to the key issues.*
In the third of these articles, we examine taxation and accounting issues.
1. The UK has always had primary control over direct taxation, but will it be more inclined to “go its own way” and ignore European and international convention and initiatives outside the EU?
There has always been considerable scope for the UK to set its own direct tax policies but in terms of ‘international tax’ the UK has been in a leadership position in Organisation of Economic Cooperation and Development (OECD) discussions on Base Erosion and Profit Shifting (BEPS) so one would expect that such considerations would remain relevant.
In terms of the EU, the consequences of ‘Brexit’ are mainly with international groups that operate in the different EU states including the UK, and UK holding companies. They face the potential loss of the use of the Parent-Subsidiary Directive, which may mean that dividends can no longer be paid without withholding taxes; and the Interest and Royalties Directive which, again, may lead to withholding taxes becoming payable.
Measures will be required to make sure the UK is an attractive inward investment location.
2. Will the UK Government change its approach to VAT and VAT rates, freed from the restrictions imposed by the EU and, if so, what changes will occur?
It is difficult to see how this could be radically changed in the short term, if only because the UK is reliant on VAT as a major source of tax revenue; VAT is one of the three major taxes in the UK alongside income tax and national insurance.
In the longer term, of course, there will be no need for referrals to the Court of Justice of the European Union on VAT matters, nor will the existing jurisprudence built up over 40 years remain applicable so in time this tax is likely to become a more distinct and bespoke tax in the UK. Part of the Government’s evaluation when considering to what extent to change VAT, hopefully, will be how much resource is available in HMRC to support any changes to VAT particularly if there is the ongoing drive to reduce HMRC manpower.
So, within the UK, for those with a technical and litigious bent, there will be plenty of scope to test UK VAT law which will no longer be underpinned by EU jurisprudence. For the more practically minded who wish to ensure compliance at the least cost, VAT may simply become more uncertain.
For international businesses that continue to trade with the EU, VAT may become a more significant compliance burden, and likewise with Customs Duties.
3. If there is an emergency budget, which taxes will increase and if significant sums are required does this mean the end of the triple lock on income tax, VAT and national insurance?
The new Chancellor, Philip Hammond, has already said there will be no emergency budget and he plans to await the Autumn Statement before making any further announcements on tax policy and potential measures. However, decisions need to be made now about whether to go ahead with releasing all the consultation documents which had been expected.
It remains to be seen whether the promise not to raise income tax, national insurance or VAT rates during this parliament will be maintained in the next budget; it could be overruled at any time if the new Chancellor has other priorities.
Business and accountancy
4. What will be the impact of Brexit on UK Government policy in other areas which impact British business and the accountancy profession such as: Anti-Money Laundering; Data Protection; Competition; Financial Services; Harmonisation of Product Standards; Consumer Rights; Pensions?
Subject to the terms of any deal negotiated with the EU the UK Government would need to give consideration to any changes it would seek to make in these areas.
Given the importance of financial services to the UK economy it is likely that this is an area where the UK Government might focus considerable time to identify any specific rules which it believes unnecessarily affect the attractiveness of the UK financial services sector but it is unlikely to undertake a major revision of the applicable regulatory framework.
5. In areas of accountancy, what new policies will follow? Will it be inclined or persuaded to depart from International Financial Reporting Standards (IFRS) and re-establish UK Generally Accepted Accounting Practice (UK GAAP)? Will the EU Audit Directive and Regulations continue to be implemented as planned, or will some aspects be reversed?
As the UK intends to remain a global player, after all it is the fifth largest economy in the world, then one would expect that it would need to require listed entities to comply with global standards in the area of financial reporting.
It is therefore highly likely that the IFRS requirement would continue to apply to the consolidated accounts of entities listed on the London Stock Exchange and AIM. Currently this requirement specifically relates to IFRS as adopted by the EU. However, following its exit, the UK would have the ability to specifically adopt IFRS standards as issued by the IASB without them firstly having to be adopted by the EU.
The UK could of course establish its own adoption mechanism, possibly via the Financial Reporting Council. There would appear little scope for setting rules requiring the use of financial reporting standards other than IFRS for such entities. IFRS is now seen as the global benchmark in terms of financial reporting standards and therefore their use, or the use of standards substantively based on the IFRS framework (adopted standards), would appear to be the primary option.
On the audit side, the UK has only just introduced the 2014 EU Audit legislation. This legislation has therefore been introduced as required. As long as the UK remains a member of the EU there will be no scope to revise any of this legislation and related provisions. However, depending on the agreement reached with the EU and also dependent on the views of stakeholders, there may be scope for amending certain aspects of this legislation.
* Given the fluid nature of this new political reality and rapidly unfolding developments, we are updating this page and related pages with new information as it becomes available.
Brexit Insights: Share your views
We are looking for CAs to contribute their views and analysis on Brexit as part of our new Brexit Insights series, to help shape the future of business and accountancy in the UK.
Get in touch with the ICAS Brexit team if you would like to be involved.