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Never mind Brexit, what does "Smexit" mean for UK tax?

January 18th, 2017 by Robert Leggett - Partner

As I write this, I have just got out of the car, where I have been listening to Teresa May’s press conference on her stance for Brexit.  This has got me thinking about what effect her announcement that we will be moving to a full scale “Smexit” (Single Market Exit) will have for tax.

Ever since the referendum, people have been asking me what impact Brexit will have on tax.  My stock answer has been that “we really don’t have a clue yet; so much will depend on whether we remain in the single market or not”.  Now we have our answer.

So why does this matter for tax?

Clearly membership of the European Union comes with many restrictions on what National Governments are allowed to do, but when it comes to tax, many of these would still have applied if we were remaining a member of the Single Market.

For instance, significant changes were made to the Enterprise Investment Scheme in 2015, which made it much more restrictive.  These were driven by the need for the UK to comply with State Aid rules; something which we would still have been subject to in the Single Market.  The R&D tax credits scheme is similarly restricted, and it could well be that future Governments will want to take advantage of more freedom to incentivise such areas further.

VAT is a European tax.  We didn’t even have VAT before our Common Market membership; instead, we had a Purchase Tax which was levied on the wholesale price of goods.  Whilst it seems highly unlikely that the Government’s third most lucrative tax will be scrapped any time soon, if we are no longer within the ambit of European rules and case law of the European court, we could see significant changes aimed at simplification, fairness and competitiveness.

Freed from the principle of freedom of establishment, expect changes to how businesses move around.  There are certain tax protections offered now for businesses moving from the UK to elsewhere in the EU, which might prevent certain “exit taxes” which would apply if moving outside of the Union.  We can probably expect the future rules to be pretty much the same whether these movements happen with EU countries or those further afield.

Transfer pricing is another area.  UK to UK transfer pricing was only applied as it was contrary to freedom of establishment to insist on this between connected parties in two EU member states, but not between UK connected parties.

The list goes on.

Of course, if we are to negotiate a myriad of free trade agreements, not just with the EU and the USA, but many other too, then it is possible that these will still impose some restrictions on what tax policies the Government can follow, especially as respects to businesses and citizens of those other countries.  The same is true of our network of bi-lateral double tax treaties.

However, what is now clear is that if Teresa May is successful, then the Government of the day (whoever they may be) is likely to have a level of control over what they do with the tax system which is unprecedented within my lifetime.  What they will do with this new found power is anybody’s guess.  As a tax adviser, this excites me at the possibilities, but equally fills me with dread at what a Government might do!

The world of tax has some interesting times ahead!


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