It is imperative that taxation policies in the run-up to Brexit respond properly to both the opportunities and issues that this event will create. Focussing upon one at the expense of the other could damage the UK’s ability to restore its intended position as a business-friendly location with competitive tax rates and reliefs. In recent years, this stated government policy has been eroded by inadequate consultation on certain significant business tax changes.
So far as the issues are concerned, it is important that HM Treasury (with the necessary input from HM Revenue and Customs) examine the changes which will occur when the European Union’s Parent-Subsidiary Company Directive no longer applies to the UK. At this stage, it will need to fall back upon the provisions contained within the individual double tax treaties it has in place with each of the other EU member states. More often than not, changes to those treaties will not present any insurmountable hurdles, but the speed of implementation of double tax treaties is often glacial. The risk is that, without such treaty changes, unnecessary taxes could arise upon UK subsidiaries and branches and it would be no comfort to UK business that the remaining members of the EU might be similarly affected.
Other areas where attention is needed include customs duties and value added tax. The imposition of customs duties between the UK and the remaining EU27 would be costly for consumers, place a financial burden upon businesses and would benefit no one. Hopefully businesses will be able to persuade their governments that this is the case. The UK government ought to look to repeal existing customs duties where they disadvantage both consumers and businesses, as is overwhelmingly the case.
So far as VAT is concerned, there are good reasons why the UK should continue with this tax in its present form, certainly until well after Brexit has occurred. There are, however, some exceptions to this approach. Firstly, the UK should raise the threshold for compulsory registration for VAT to well above the existing threshold (of £83,000) prescribed by the EU. Relieving large number of additional small businesses from compulsory registration would cut their compliance costs and would not have any noticeable downside impact upon the remaining EU27. Secondly, the UK may wish to flex the existing requirements to standard rate some consumer goods where there has been a public demand to reduce the VAT currently applied. Thirdly, the EU VAT system, as enforced by the European Court of Justice, focusses upon a Continental European model for the delivery of financial services (including insurance).It favours an ‘in house’ back office approach as opposed to the outsourced approach adopted by many UK-based entities. Therefore, they are unable to benefit fully from the VAT exemption for insurance. Rectifying this anomaly would be a sensible change post-Brexit and ought to reduce costs for UK consumers.
In many ways, the opportunities following Brexit are more interesting from a tax perspective and are certainly likely to provoke more debate. Consider, for example, the removal of the European Court of Justice’s ability to overturn tax decisions in the UK tax courts; the EU’s gold-plating of the OECD’s/G20’s ‘Base Erosion, Profit Shifting’ (or ‘BEPS’) outcomes through its Anti-Tax Avoidance Directive (‘ATAD’); and, the scope to liberalise and democratise the tax reliefs for enterprise investment schemes (‘EIS’) and seed enterprise investment schemes (‘SEIS’).
EIS and SEIS are currently constrained by complex rules in the EU to prevent what is perceived to be prohibited ‘state aid’ to businesses. Few businesses will regret the removal of the European Court from tax matters. Even fewer will miss the complex additional ATAD rules in pursuit of BEPS outcomes, which are over and above what the OECD, G20 and UK government wish to implement. So far as EIS and SEIS are concerned, the UK government should look to other global jurisdictions beyond Europe and enact the best rules found in other successful, entrepreneurial economies such as the USA. This will facilitate securing equity capital by start-up and scale-up businesses to accelerate their growth.
In conclusion, the UK government should listen to businesses of all sizes and across all sectors before determining its strategy for post-Brexit taxation. The UK should also maintain flexibility in these negotiations, focus on addressing the principal issues which will arise, and preserve its freedom for future tax reforms and tax simplification for businesses and individuals.