Business and Brexit: adding up the tax challenges
Accountancy & Tax Brexit will undoubtedly force changes to UK tax. So what will the tax landscape look like once we have left the EU — and how will it affect British businesses?
If you asked business leaders for their top Brexit-related challenges, the chances are that tax might not figure prominently on their list. Trade deals and movement of people seem to be commanding most attention at present. But tax is part and parcel of these issues, and companies are starting to wake up to the potential challenges they could face when the UK parts company with the EU.
One such issue is the potential for greater customs formalities and costs when UK businesses move goods to and from Europe. “At present, it appears that the UK will leave the Customs Union,” says Matthew Clark, head of UK customs, excise & international trade team at PwC. “That means a customs border will come into force between the UK and continental Europe and the Republic of Ireland. In order to process goods across this new border, businesses will need to submit two customs declarations upon export from the UK and import into the EU. They’ll also be faced with charges from customs agents to submit these customs declarations of anything between £20 for simple consignments to £100 for complex ones.”
Accounting standards require tax to be measured based on current law not based on assumptions as to what the law might be
UK importers and exporters will have to get to grips with the extra administration associated with a customs border, too. “Customs declarations contain a lot of data and can be difficult things for businesses to complete, particularly if they have never traded outside the EU before,” says Clark. “We are speaking to a lot of businesses now to identify early which of their supply chains will be affected, in order for them to have enough time to plan and enact the necessary changes to ensure business continuity post Brexit.”
In the same way that some businesses are reviewing the movement of goods, many are reviewing the movement of what is often their most important asset – their people. And this brings tax challenges.
“Some firms are considering moving jobs outside the UK but the reality of moving the current occupiers of these jobs is different”, says Iain McCluskey, HR and mobility tax partner at PwC. “We are likely to see an increase in international commuters – people living in the UK but working overseas, or from home. The tax system is simply not designed for this type of working, with all sorts of complexity created not just in relation to income tax and social security, but also corporate tax as well.”
Tax reliefs and exemptions
Another big challenge is identifying which tax reliefs and exemptions will continue to apply post Brexit, as number rely on Britain being a member of the EU.
This could have an immediate effect on financial reporting. “If a business is going to suffer a material impact from Brexit — because certain tax exemptions will no longer apply, for example — then it needs to consider disclosure in its financial statements now,” says Panny Loucas, international tax partner at PwC.
“Accounting standards require tax to be measured based on current law not based on assumptions as to what the law might be. But to the extent that there may be material tax impacts which are difficult to accurately assess, a company may need to disclose the assumptions and judgements it is making. This means that businesses need to carefully think through the potential tax impacts of Brexit.”
An example of a tax relief that could cease to apply is the parent/subsidiary directive. “Many UK businesses with operations across Europe benefit from this directive”, says “If certain conditions are met, dividends from EU subsidiaries of EU parent companies can be sent back to the parent country free of withholding tax.” Post Brexit, in the absence of additional agreements, UK groups with profitable EU subsidiaries in countries such as Germany and Italy may have to consider ways of bringing profits back to the UK without bearing extra tax costs. “This is just one example of why it’s worth businesses thinking through how they might be affected so they can plan ahead” Loucas adds.
The sector is undoubtedly one of the nation’s strategic strengths
Yet there are areas where the UK can set the agenda. In a post-Brexit world, it's essential the UK remains an attractive location for business and investment. The Government may therefore introduce tax changes to boost competitiveness, such as a further cut in the rate of corporation tax, as some have speculated — although this could be controversial and antagonise EU states.
More likely is a broader package of competitiveness-improvement measures, and the UK's financial services sector could be a key recipient of these. “The sector is undoubtedly one of the nation's strategic strengths, and its success can be harnessed to support the growth of the economy as a whole,” says Sarah Prior, financial services tax partner at PwC. “Tax has a key role to play in creating the conditions for the UK's financial services sector to thrive and the approach of Brexit provides an opportunity for the Government to review its policy in this area.”
Ultimately, the Government may use Brexit as a springboard for fundamental tax reform, notes Andrew Sentance, senior economic adviser at PwC. “Certain taxes — particularly VAT and excise duties — are constrained by European Legislation,” he says. “Outside of the EU, the UK can have more flexibility in these areas. For example, under EU law, only two rates of VAT are available: standard and reduced. Post-Brexit, the Government could set as many VAT rates as it wanted.”
But might this new found flexibility also cause problems? That's a possibility, admits Sentance. For example, without careful thought, there's a risk that the already complicated UK tax system could become even more complex. “Our tax system is needlessly complicated and hasn't undergone root-and-branch reform since the 1980s,” he says. “We should try to use the flexibility we could have post-Brexit to make it much simpler.”
For more information: http://www.pwc.co.uk/the-eu-referendum.html