The one thing that is certain about the UK’s Brexit vote is that it creates uncertainty. In this note we give our thoughts on some possible impacts on taxation.
- We do not think it is likely that anything will happen in the near term. Yes, Mr Osborne warned during the run-up to the referendum that on Brexit he would bring in an emergency budget increasing basic and higher rates of Income Tax and raising Inheritance Tax. We are unsure if that is politically possible.
- We envisage that there may over time be changes to VAT. Remember that VAT is essentially a Europe-wide tax which takes effect through a number of European directives having direct effect in each member state. This has as a matter of law hitherto constrained the UK’s ability to set its own rates and reliefs. Post-Brexit, no such constraints will exist so perhaps we shall see increasing tinkering with VAT and increasing divergence between UK and EU VAT rules.
- To preserve fair competition between companies in different member states the EU has strict rules on the ability of member states to provide state aid (which includes special tax reliefs) to their domestic businesses. These may have previously affected the UK’s ability to target reliefs or even to give tax breaks at all in certain areas. Subject to whatever is negotiated regarding access to the Single Market, we may over time see changes to tax rules here.
- The EU rules on freedom of movement and freedom of establishment are well known. These mean, broadly speaking, that it is not permissible to discriminate between persons by reference to the member state in which they are established. Any change to those rules will potentially have an effect on businesses. But it is worth remembering that most of the UK’s Double Tax Treaties (of which there are many) contain their own provisions prohibiting a country from imposing tax measures which discriminate against a company or person resident in the treaty country. These treaties and their non-discrimination clauses are unaffected by Brexit. So any change to the EU freedom of movement and freedom of establishment rules may be of less consequence in the tax field than in other areas.
- One other area in which change may be seen is where individuals wish to become non-resident. Hitherto, it has been relatively straightforward to take up residence in another EU member state. Without freedom of movement this may well become more difficult and add a further level of complexity to international tax planning.
- Issues may potentially arise for British citizens who are currently resident in other EU member states – for example those who have retired to the Costa del Sol or perhaps those younger ones who are working in the EU. If those people are required to repatriate to the UK there may be personal tax issues that need to be considered – shortening the period of absence beyond that originally expected may for example turn returners into “temporary non-residents” or have IHT consequences.