Posted on September 15, 2017

Brexit is a big uncertainty in the UK economy, and will impact many aspects of our economic life, taxation being one of them, whilst a lot of this is uncertain at the moment one thing is certain, there will be changes.

VAT was introduced to the UK when it joined the European Economic Community in 1973. It replaced a consumption tax, called purchase tax, which existed from October 1940 to March 1973. VAT is a European Tax, so by the UK leaving the EU, the UK will have an opportunity to keep the structure of the tax, remove it, or replace it.

The expectation is that it will stay mainly due to the tax revenues it generates, which are at an all time high of £115bn in 15/16. The Court of Justice of the European Union (CJEU) has authority over VAT. This will end after Brexit. The UK courts will probably continue to use CJEU rulings on VAT, this would make the system workable. This is the most likely scenario, but there are other sales/consumption tax models available.

Corporation tax,is a direct tax and was introduced in 1965 at a rate of 40%, it is currently 19% and is expected to fall to 17% by 2020, which by international standards is a very competitive rate, add to that the robust UK legal system the UK will be an attractive place for multinational corporations, as well as being good for UK enterprise. There are no European directives dealing with direct taxes but any UK laws at present must currently comply with European legislation and should not be discriminatory. It is uncertainty how Brexit will affect this.

One of the most significant issues, especially for the city of London is losing acces to the reduced withholding tax rates on interest, royalties and dividend distributions that are available under various EU Directives. Plus the risk that banks could lose their financial passport, which allow companies in one member state to serve customers in the other 27 without setting up local operations. This is a clear threat to the city of London and there are various estimates of job loses ranging from 30,000 to 100,000.

The UK is engrained in EU business models, and the profitability of many UK firms is dependent on these models and will be threatened by the UK leaving the single market and customs union. The Government is likely to see a rise in foreign owned businesses seeking assurance over reliefs and tax breaks before committing to investment or even foreign owned businesses relocating. The Government will have more flexibility around reliefs for R&D expenditure and innovative businesses which may be good news for the UK economy.

High tech innovative companies are highly prized by European countries, they create well paid jobs and deliver good tax revenues to Governments. The UK has an opportunity to create a structure to attract these innovative companies.