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What are the Tax Implications of the UK Leaving the EU?

Jul 6th 2016
Wolters Kluwer
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June 23, 2016, will go down in history as the day the United Kingdom voted to leave the European Union, setting into motion speculation as to what happens next.

Ahead of the referendum, Prime Minister Cameron said in the event of a Brexit vote, he would be required to immediately invoke the rules contained in Article 50 of the Lisbon Treaty to put into motion a two-year period that upon its expiry will see the UK decoupled from the European Union. In the wake of his resignation announcement, it has been widely reported that Mr. Cameron intends to leave activation of Article 50 to his successor. Until then, multinationals doing business in the UK will continue to operate under current arrangements.

These two years, and any time before that, will allow the UK to begin negotiations on whether it may remain a part of the Single Market and the conditions that would be attached, as well as the other various issues.

If, by the end of the two years, agreement has not been reached to the mutual satisfaction of both the UK Government and the remaining 27-member European bloc, there are likely to be significant ramifications for the UK, in terms of taxation and the wider economy.

Continued participation in the Single Market will involve the payment of a fee to the Union, and the UK would be required to adhere to the same EU Single Market rules and adopt EU decisions as before. Under this scenario, not much would change from a tax perspective insofar as trade with the EU goes.

Failure to secure participation in the Single Market would mean that UK businesses will face new tariff and non-tariff barriers when doing business in the EU, and vice versa. In addition, after the UK ceases to be a member, the UK's participation in EU trade deals would cease. This will mean that UK businesses will face new barriers – both tax and non-tax – to non-EU markets, until new deals are negotiated, with basic market access terms at WTO baselines.

Additionally, the UK will no longer have to comply with the Union Customs Code framework, which is being phased in from now to 2020.

With regard to value-added tax (VAT), the post-EU picture is a little clearer. Following a UK exit from the Union, the UK will be free to set its own value-added tax rates, potentially leading to broad changes in this area. In reviewing UK rules, businesses will be hopeful that compliance requirements for UK-based companies will continue to be broadly in line with those currently in place, to ease the burden of trading with the EU. However other changes may be necessary as UK goods and services may no longer be treated as intra-community supplies or acquisitions.

In terms of international taxation, the UK would be free to take its own position on the OECD's BEPS project, although it would still be accountable to the international community. Although this would mean that the UK would no longer be obliged to transpose the EU Anti-Avoidance Directive into UK law, given the UK's strong stance in the area, the adoption of broadly equivalent rules is thought likely.

Moreover, the EU parent-subsidiary directive would no longer apply which would mean that intra-EU dividend distributions from a parent to a subsidiary could now be taxed twice. This EU parent-subsidiary directive eliminates withholding tax on the payments of dividends between associated companies in EU member states and prevents double taxation of parent companies on the profits of their subsidiaries

In terms of the application of EU case law in the UK context, it is assumed – although this remains as yet uncertain – that European Court of Justice decisions after the UK ceases to be an EU member will no longer apply to UK firms, and UK businesses will instead rely solely on UK court decisions. This is expected to give rise to uncertainty in the short term as well as to an uptick in disputes.

As can be seen, then, at the time of writing, the future shape of both the United Kingdom – with speculation that the Brexit may spark a second independence referendum in Scotland, where the populace voted overwhelmingly to remain – and the European Union remain uncertain, with the winds of change blowing strongly across the English Channel.

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