The result of the recent Brexit referendum, in which the UK decided to leave the EU, potentially has very significant economic implications for the country, in particular the UK tax system. However, this is only the start, as the UK will not actually leave the EU for at least another two years, so whilst there is now a period of uncertainty for business, there is also time for the UK to start taking necessary action.
We consider some of the tax implications of Brexit...
As there will be no immediate change, it is not necessary or advisable for you to take precipitate action on tax matters, especially since we do not know what action will yet be taken by the UK Government.
The EU has negotiated favourable trading terms with other countries, but the UK has not negotiated new trade agreements in years, so it is unknown how long it will take to put new agreements in place. As a result, businesses may need to review their supply chains, with the chances that exports and imports of goods from and to the UK may be hit by possible additional duty costs and/or administration. However, in the short term there will be no effect as the customs union will be preserved until the UK actually leaves the EU.
Moreover, the UK VAT legislation would no longer be bound by European constraints, for example over what can be zero rated and the rate at which VAT is charged. However, whilst there may be more freedom for the UK Government in formulating VAT policy in future, it is still likely that European VAT law would influence UK policy in order to deal with potential for tax avoidance and uncompetitive double taxation.
Whilst the UK does have an extensive network of double tax agreements to fall back on, not all eliminate or reduce the rate of withholding taxes on payments of dividends, interest and royalties. In the absence of a treaty, payments of interest and royalties from the UK would be subject to withholding tax at 20%, meaning that the recipients may look for compensation through “grossing up” clauses in legal agreements.
Regarding Base Erosion and Profit Shifting (“BEPS”), the EU has drafted an anti-tax avoidance directive for approval by the European Council. With Brexit, the main concern for multinationals is corporate interest deductibility, broadly set to be capped at 30% of EBITDA, which is included in the draft EU directive. However, as the UK has been a driving force behind the OECD-G20 BEPS project, it is highly unlikely the UK will shy away from this now.
INDIVIDUALS AND PERSONAL TAX
Changes have already been announced to try to increase the UK tax take from wealthy individuals who make the UK their home for the long term. Greater flexibility to offer incentives to invest without breaching current EU state aid restrictions could lead to additional inbound investment. Ultimately, whether the UK sees more or less investment from overseas is likely to depend on whether such decisions are made principally for economic or political gain.
The Leave campaign placed so much emphasis on immigration that it will probably be fairly high up on the agenda once negotiations begin. The UK would probably look to extend the existing points-based system for both non-EU nationals to EU nationals, subject to relaxations to meet European Economic Area requirements.
The effects are likely to affect low-paid, less skilled roles, so it is very possible that there may be more stringent points-scoring criteria with selective relaxations for specific sectors or industries where the country is experiencing shortages. An overall cap on numbers is also a very strong possibility.
The greatest certainty is that there will be costs involved, both for the UK employer and the migrant themselves, as well as additional likely administrative burdens. Employers therefore should factor in the need for Brexit reviews of global mobility costs and risk plans for the next two years onwards.
There is undoubtedly a period of considerable uncertainty for the UK, which is not good news for business. However, the full impact of Brexit may be softened by the UK renegotiating replacement deals with both the EU and non-EU countries. The great unknown is how favourable these will be and how long this will take.
Given there will be no immediate change, it is too early to assess what the final tax implications will be. And especially since it is still in uncharted waters of what action will yet be taken by the UK Government, it is not necessary or advisable for enterprises to take precipitate action on tax matters.
If you need more help or advice, we have set up an email address Brexit@mazars.co.uk to serve the clients best with Brexit questions.
Should you need any assistance on other matters in Vietnam, don’t hesitate to contact us at the details in the side boxes.
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