The UK’s exit from the European Union (Brexit) has brought many changes. As a business owner, you may be wondering how Brexit will affect your tax affairs. At the time of writing, the detailed terms have yet to be fully negotiated. However, the good news is that most UK tax laws are outside the direct control of the EU, meaning that the overall tax impact of Brexit may not be as severe as originally anticipated. However, there are significant exceptions that could impact your business.
Tax law after Brexit – what will stay the same?
Key aspects of the UK tax system will remain the same after Brexit .These include income tax, capital gains tax, and inheritance tax.
The Chancellor has tightened the budget with a 2% increase in the basic rate of tax (currently 20%). He has also said that inheritance tax could rise by 5% (currently 40%).
The tax implications of Brexit, however, may be felt in other areas. If clients import or export goods, they should prepare for additional costs related to VAT and customs duties.
On the other hand, when employing workers performing their jobs in one of the EU countries, employers will be required to pay double contributions for social security benefits.
Brexit’s Tax Impacts: VAT
One of the most significant areas of potential change is VAT (Value Added Tax), which is essentially an EU-driven tax.
After leaving the EU, the UK will no longer be required to adhere to the EU’s VAT system. However, it is almost certain that VAT will not be abolished since it generates substantial revenue for the Treasury. Some changes are expected in how VAT operates:
How Brexit could affect VAT:
- The UK government will have more flexibility to decide which goods or services qualify for reduced VAT rates or exemptions, and will no longer be bound by EU restrictions. For example, it may be possible to remove the 5% VAT on domestic fuel, although this is considered unlikely due to the government’s need for revenue.
- HMRC’s interpretation of the VAT rules will no longer depend on decisions made by the European Court of Justice (ECJ).
- Depending on the terms of trade negotiated with the EU, trade between the UK and the EU may no longer fall under intra-Community acquisitions and sales. Instead, an 'import VAT’ may be introduced, which is likely to be recoverable but may cause unwanted cash flow issues between import and VAT refunds.
Tip:
Calculate how much working capital you will need to finance potential VAT costs associated with imports.
Brexit and Customs Duties
If Brexit results in the UK leaving the Customs Union, trade between the UK and EU will likely incur customs duties. This will put UK businesses at a disadvantage compared to competitors within the EU, potentially raising the costs of imports and exports.
Withholding Taxes on Dividends, Royalties, and Fees
Currently, when a parent company in one EU country receives dividends, royalties or fees from a subsidiary in another EU country, no withholding tax is applied.
However, after Brexit:
- UK-based parent companies with subsidiaries in EU countries,
- EU-based parent companies with UK subsidiaries,
may be subject to double taxation on dividends, royalties, and fees unless double taxation treaties dictate otherwise.
While the UK has treaties with all EU countries, not all provide 0% withholding tax. For example, under the UK-Luxembourg treaty, a 5% withholding tax applies to royalties.
Tip:
- Consider whether having a foreign branch might be more advantageous than a subsidiary.
- Assess whether your current group structure could lead to withholding tax exposure under the UK’s double taxation treaties, and if so, evaluate whether restructuring would be beneficial.
Post-Brexit social security contributions
Currently, UK workers employed in another EU country pay social security contributions in the country where they work.
If the UK leaves the EU system, workers may have to pay these contributions in both the UK and the EU country where they work.
For businesses employing staff in several EU countries, this could significantly increase employee-related costs.
