On 23 June 2016, in an historic referendum, the UK public voted to leave the European Union (“EU”). The following weeks have been filled with political and financial uncertainty, as the country contemplates its future outside the EU. However, one thing seems to be certain: in the words of our new Prime Minister, Theresa May, “Brexit means Brexit”.
The precise impact of Brexit on UK taxes will depend on the new terms negotiated with the EU. The most likely scenarios for a post-Brexit UK include:
- The UK joining the European Free Trade Association and the European Economic Area, and so retaining access to the single market, in the same way as Norway, Iceland and Liechtenstein;
- The UK negotiating a standalone free trade agreement with the EU, as Switzerland does; or
- The UK negotiating an ongoing customs union with the EU, as Turkey does.
The good news is that much of the UK’s tax legislation is independent from EU influence and will therefore be largely unaffected by Brexit. This includes income tax, capital gains tax and inheritance tax. However, there are a few notable exceptions:
VAT
UK VAT has been harmonised with the EU since 1977. Following Brexit, whilst the UK may no longer be required to give effect to any EU VAT Directives or regulations, it seems likely, in the short term at least, that the country will maintain its current VAT system.
The most tangible consequence of Brexit is that VAT may need to be charged when goods enter the EU from the UK and when EU goods enter the UK. The VAT will often be recoverable, however this could still cause unwelcome cash flow issues for many businesses.
Customs duties
To the extent that the UK ceases to be part of the customs union, then customs procedures would need to be reintroduced for exports between the UK and the EU.
However we are unlikely to see the imposition of any significant customs duties as this would disadvantage the UK’s exports (around 50% of UK exports are to the EU).
Corporation tax
Although corporation tax is determined only by the UK government, the UK has still been required to amend its tax legislation, on several occasions, to comply with EU Law. After Brexit, UK tax legislation should no longer be open to challenge on the basis that it is contrary to EU law.
On a wider scale, Brexit may also accelerate the harmonisation of corporate taxes across the rest of the EU, a move which the UK has historically opposed.
In summary, there remains significant uncertainty around how great an impact Brexit will have on UK taxes. However it is likely that any changes will be focussed on the technical rules, rather than increasing (or decreasing) the overall burden on taxpayers.
