BREXIT: Dealing with tax challenges

Out-Law Analysis | 08 Jun 2017 | 10:31 am | 2 min. read

ANALYSIS: Considerable uncertainty lies ahead regarding the tax challenges of Brexit, particularly as regards customs duties and tariffs. There will almost certainly be increased compliance costs and a need to upgrade systems and retrain staff. Businesses should look at their contractual arrangements and begin to prepare.

Customs duties will be the biggest Brexit tax challenge for those importing and exporting goods between the UK and the remainder of the EU. There could also be implications for imports and exports from and to third countries, as the UK is likely to lose access to the EU's Free Trade Agreements with third countries. We simply do not know at this stage where negotiations will end up and what if any additional tariffs will result. What is extremely likely, however, is that businesses will incur increased compliance costs and may need to upgrade systems and retrain staff. Businesses should be budgeting for increased costs in this area.

Assuming the UK will leave the customs union - as seems to be the current plan - tariffs are only likely to be sorted out when future trade deals are negotiated. This is likely to take a considerable amount of time so this is not an area where businesses can realistically expect early clarity. However, businesses across the EU should already be considering the impact on existing contracts of possible increases in import tariffs. Can additional costs be passed on to others or will they have to be borne by the business? Make sure that new arrangements apportion the risk appropriately.

Leaving the EU will give the UK government the opportunity to reconsider its policy in relation to VAT. At present the UK is obliged to maintain a VAT system complying with EU law. Post Brexit that obligation will fall away. However, VAT is unlikely to be abolished as it raises significant revenues. It is also unlikely that it will be radically changed as businesses have become accustomed to the way the tax operates and changing it significantly for no tangible benefit would be very unpopular. Over time we will probably see a divergence from EU VAT, particularly in areas such as financial services and outsourcing, where some aspects of EU case law do not necessarily work well for UK businesses (or, in some cases, for HM Revenue & Customs). Businesses will need to consider whether additional VAT registrations in EU member states could be required as a result of the UK leaving the VAT union.

Businesses with VAT or other EU based litigation proceeding in the tribunals and courts (particularly repayment claims) will be concerned about the transitional issues regarding the role of the Court of Justice of the European Union (CJEU). The UK government has said that CJEU case law pre-Brexit will continue to be as binding as a Supreme Court decision, but we do not know what will happen as regards UK cases in the CJEU pipeline on the day the UK leaves the EU or what will happen as regards disputes after Brexit as to the meaning of EU law pre-Brexit.

For UK direct taxes such as corporation tax, Brexit will change little as the taxes are purely domestic. Although, businesses that rely on the Parent-Subsidiary Directive or the Interest and Royalties Directive could see their overseas tax bill increase, if those withholding taxes are not independently eliminated by the relevant double tax treaties.

Corporation tax is due to reduce to 17% in 2020, and the previous Conservative government has committed to keeping the rate low (although Labour has said that it may raise corporate taxes). It could be reduced further to stimulate foreign direct investment. However, the UK remains committed to the OECD’s project to reduce international tax avoidance. There are therefore limits to the extent to which it will be able to change the UK tax code as it applies to cross-border situations.

So, considerable uncertainty lies ahead, particularly as regards customs duties and tariffs, but businesses can begin to prepare so that Brexit is not a step into the dark.  

Heather Self is a corporate tax expert at Pinsent Masons, the law firm behind

This is based on an article which was previously published in the International Chamber of Commerce's 2017 edition of the UK G20 magazine; 'Building Bridges Post-Brexit', published on 30 May 2017.