Nearly two years after the UK voted to leave the European Union, it is still not totally clear what impact Brexit will have on Britain – especially as we await the outcome of the negotiations between the government and the EU. However, one area Brexit may well impact is tax policy – especially for business taxes.
Corporate and general tax issues
“Generally, the feeling is that most corporation tax issues will be quite manageable,” Daniel Lyons, head of Deloitte’s tax policy group, says. “However, there are some implications around withholding tax, and while most of those will be picked up in tax treaties, there are one or two instances where that is not the case.”
“There is lots of uncertainty about the UK corporation tax rate going down to 17% – it’s difficult to see how the economy can afford it,” says George Bull, senior tax partner at RSM. “Are we even sure it’s going to happen? I think two potential changes to consider are: first, what will the corporation tax rate be; and second, are there any tax reliefs where we can be more generous once we’ve left the EU [to boost our competitiveness] because state aid rules currently prevent how generous we can be.”
Taxation of technology giants
As well as looking at targeted tax reliefs, there could potentially be changes in the way global technology giants are taxed, Bull suggested. “If the so-called ‘Google tax’ has failed, will there be a turnover-based tax on technology companies in respect of their UK sales instead?” he asked. Indeed, the idea of a digital turnover tax is a highly topical one. The EU proposed on 21 March a 3% levy on EU business-to-business revenues of technology giants such as Google and Facebook, as well as Apple, Uber, Amazon and Airbnb. It would remain to be seen whether the UK, independently of the EU, followed suit. However, Bull expressed his belief that “it would be easier to increase VAT” to raise revenues rather than implement an “unprecedented” tax on turnover.
“Regarding technology companies such as Facebook and Google, Brexit would make it easier for the UK to follow its own course, but the UK would be trying to tackle this issue in isolation,” Bull added. “There have been reports saying Brexit may cost as much as the £350m a week [that the ‘vote leave’ campaign claimed Brexit would save]. If we can’t borrow more or cut more expenditure, extra revenue will have to come through tax increases. But the tax base is shrinking – either we will have to bring more people into the taxpayer net, or new taxes will have to be levied.”
Legal processes
But there are other issues around the legal process to consider from Brexit, Lyons says. For example, post-Brexit the highest court in the UK will be the Supreme Court, not the Court of Justice of the European Union (CJEU), and while the Supreme Court will be bound by CJEU decisions taken prior to Brexit, it is not clear what will happen to those tax cases currently making their way through the CJEU – or even those that are referred to the CJEU during the transition period, especially if the cases are not scheduled to be heard until after the UK has left.
Furthermore, “most tax changes – especially VAT changes – will be introduced through secondary legislation,” Lyons points out. “What scope will Parliament have to scrutinise this properly? The risk is that this could lead to tax legislation that has not been properly consulted on.”
VAT and the customs union
VAT and customs duty are the taxes that are the most obviously impacted by Brexit. The “picture on customs duty looks complicated”, says George Bull, senior tax partner at RSM, and “it is not clear if HMRC’s systems will cope will the potential changes”. Daniel Lyons, head of Deloitte’s tax policy group, agrees – adding that “there is a bit of a myth going around” that being part of the customs union post-Brexit will mean “frictionless trade” of goods coming into and out of the UK. “While it is less clear what will happen with customs duty itself, if we decide to remain in the customs union, this may mean zero tariffs on goods but there will still be cross-border issues, as you cannot move goods freely across borders,” Lyons says. “You will need to be in the single market for that.”
Acquisition of goods
For Lyons, the “most obvious change” concerns VAT on the acquisition of goods coming into the UK. “After Brexit happens, goods coming into the UK will be charged with import VAT that can’t be recovered, and the VAT will need to be paid largely upfront,” he explains. “The UK imports a lot of goods from the EU, so there will be cashflow implications for businesses.”
While chancellor Philip Hammond has looked at ways of addressing this issue – the idea of some sort of “postponement accounting” for affected businesses has been floated, Lyons says – any UK-based business where the only non-UK trade is with the other 27 EU member states is likely to experience changes such as potentially extra customs duties and VAT costs, and more formalities at the UK border. “There has been lots of speculation about how long it will take non-UK goods to clear customs,” Lyons adds. “For example, it has been calculated that if you’re at the port in Dover, and you add an average two minutes to every customs clearance of goods at the port, that will all add up, and lead to a 21-mile tailback down the M20 motorway. So there could be practical problems arising too.”
Administrative burden
For customs duty, Lyons says, the burden on clients will be mainly administrative. Customs duty from non-EU imports brings in around £3bn a year, but if the UK left the EU and charged duties on goods from the EU, it could potentially raise around £12bn. However, since the highest rates are on cars and meat, “the automotive and food industries could be hit quite badly,” he says. “Even for a business in the life science field which, say, sends refrigerated, perishable product to Germany will find that Brexit may slow down the product’s journey as it goes through customs, and will need to be refrigerated longer and therefore cost more. Newspapers may talk about tariff costs resulting from Brexit, but ‘just in time’ is a bigger problem.”
VAT triangulation
There are other VAT problems as well. One concerns an EU VAT issue known as triangulation. The classic situation is a contractual supply chain where a French company is selling goods to a German company via a UK company, but with a physical supply chain of the goods going straight from France to Germany.
Under the normal rules, if the UK company in the middle takes legal title to the goods when they are, say, in France, the UK company would have to register for VAT there. “Under triangulation, the UK company does not have to register in France but, and this is the rub, triangulation only applies if all three companies are in the EU,” Lyons explains. “Also, the treatment of call-off stock and supply-and-install contracts rely on EU easements which you can’t take advantage of anymore once you’re outside the EU – you will need to register for VAT and seek professional advice.” Other extra administrative VAT burdens concern the recovery of VAT (via the VAT portal) incurred in member states where there is no permanent establishment, and the mini one-stop shop (MOSS), which relies on a business supplying electronic services to be located in an EU member state.
Potential opportunities?
However, despite the potential cost and administrative burdens Brexit is likely to cause UK businesses, both Bull and Lyons feel that there may be opportunities arising from Brexit as well.
“One positive aspect of Brexit is that once we’re out of the EU, British companies won’t need to fill in EC sales lists and intrastat declarations, so that potentially lessens the administrative burden in that respect,” Lyons observes. “There are potentially some positives in terms of VAT as well.
“Currently banks or insurance companies that supply financial services within the EU cannot recover VAT as their supplies are VAT-exempt; but supplies made by banks and insurance companies to customers in non-EU countries are deemed as outside the scope of VAT, and therefore VAT can be recovered,” Lyons adds. “When we leave the EU, then technically the entire world is outside the scope of VAT – and input VAT is potentially recoverable wherever services are supplied to.” However, he noted, the Treasury has been reluctant to accept this argument, as it would cost the Exchequer a lot of money.
“Brexit gives us a fabulous opportunity to review what we, as a country, want from our tax system,” Bull says. “It’s disappointing that … right now there isn’t the parliamentary appetite or time for it. Future tax changes are likely to be reactive rather than proactive, but we need a coherent review – the current tax system is an ill-fitting garment.”
Brexit, Bull concludes, offers “more opportunities than threats” to design a tax system that works, and modify key parts so that it works for the UK – however, he warns, “care must be taken and time devoted to the process if these opportunities are to be fully realised, instead of translating into more sticking plaster on the body of the UK tax system.”