Brexit: UK tax implications
As the newspaper column inches and TV and radio schedules fill with claim and counterclaim about the benefits and disadvantages of leaving or remaining in the EU, Taxxa takes a look at Brexit’s UK tax implications.
VAT is the most European of UK taxes. UK VAT legislation is in essence a manifestation of EU directives translated into domestic law and that law is frequently challenged on the basis of its compatibility with those basic directives. So what would happen in the event of Brexit? VAT accounts for around 20% of UK tax revenues so the likelihood of it changing substantially in the short term is minimal. And if the terms of exit were such that the UK remained a part of the Customs Union, the influence of EU law would last for some considerable time to come.
The UK corporation tax code is a creature of domestic law but the EU’s tentacles have exerted an ever tighter grip on the UK taxation of multi-nationals based both here and abroad. The EU parent-subsidiary directive has been implemented in UK law and the group loss relief rules have had to be amended following litigation invoking the EU treaty right of freedom of establishment. It is possible that, following Brexit, UK tax legislation dealing with these issues could be amended, especially as the lost litigation and the consequent legislative changes have cost the Exchequer many billions of pounds.
The other main issue from a corporate tax perspective is the EU’s State Aid rules which limit member states’ ability to stimulate certain parts of the economy through the tax system. For example, the changes in the 2015 Budget to venture capital Schemes had to receive EU approval before they could be implemented.
Income tax and Capital Gains Tax
It is perhaps ironic that a tax that was first raised to fund a war against Napoleon’s imperial ambitions has come under the influence of a European empire of another kind. The main areas of income tax affected by EU law are those relating to offshore tax avoidance. The Transfer of Assets Abroad rules and the legislation which attributes capital gains of overseas companies to UK shareholders both had to be amended a few years ago when the EU intervened on the grounds that they were incompatible with treaty freedoms. It is arguable that the new rules have not really remedied that issue as the 2014 Tribunal decision in the Fisher case demonstrated. It is also arguable that some other areas of UK legislation are similarly incompatible with EU law.
National Insurance Contributions
There are special arrangements for social security contributions which facilitate the movement of workers who are residents and nationals of EU and EEA countries. Whether these would be affected by Brexit depends on whether the UK would remain in the EEA after leaving the EU.
A great deal of tax litigation now involves consideration of whether the taxpayer’s EU treaty rights have been infringed. An example of this is the judicial review cases, Rowe, De Silva and Walapu, challenging the Accelerated Payment Notices legislation, although this fell on deaf ears as far as the Courts were concerned. There are obvious human rights issues in connection with the exercise of investigatory powers and the imposition of penalties, both of which have been addressed by Tribunals recently.
The sensible conclusion is probably that it is far too early to form a conclusion, given that much depends on the form that Brexit takes, if it happens, and that is not an issue which will be decided in detail by this referendum but by the Government, whatever form that might take once the Referendum result is known. It is far too early to tell whether the UK would leave the Customs Union or choose to remain as part the EEA. Arguably, the main issues that Leave campaigners and voters have are with the EU itself and the concept of ever closer union, so membership of the EEA, for example, is unlikely to be quite so unpalatable to them. Even if the Leave campaign wins, it is likely that the result will be close and the mandate given by the referendum vote would not extend beyond the specific question addressed by it. This referendum seems frequently to be characterised as an all or nothing decision; but in practical terms it is nothing of the sort.
There is also the ever-present issue of human rights and whether the UK would remain a signatory to the European Convention on Human Rights (not itself a creation of the EU but of the Council Of Europe which predated it) or whether it would implement a new UK Bill of Rights post-Brexit. If it is the latter, there is still the very uncertain issue of what that Bill of Rights would contain.