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it looks like the divorce could be protracted, and possibly acrimonious

Kitty Miv, Editor
30 June, 2016

To coin a British turn of phrase, it's all over bar the shouting. Or, to put it more accurately, there was lots of shouting, and now it's all over – until the shouting starts again. So Brexit it is, and given Europe's reaction to Britain's desire to separate, it looks like the divorce could be protracted, and possibly acrimonious.

According to Oxford Dictionaries, at the time of writing, the term "Brexit" is the second-most searched word in the world, and the fourth most popular search in the United States. This is just one measure of how the UK-EU split is concerning the wider family of nations, not just the protagonists themselves.

But what could be more important than "Brexit" to Americans? Apparently, "Jotun" and "albiceleste," which are the top-two searches. The third, "derecho," is strangely appropriate: "A line of intense, widespread, and fast-moving windstorms and sometimes thunderstorms that moves across a great distance and is characterized by damaging winds."

There isn't room here to consider the political, financial, economic, legal, and diplomatic implications of the Brexit for Britain, the EU, and the world. In any case, this being such an unprecedented and historic event, nobody without shamanistic powers knows what the future holds, and even the most visionary of soothsayers will struggle to tell you how it will all pan out. What we do know is that the EU, for all its manifold faults, is generally liked by multinationals because of the single market and the relative certainty that it offers. And they like Britain in particular because of its EU membership, low corporate tax, flexible labor market, and relatively light regulation (in comparison to other member states at any rate). Hence, a great many of them urged Britain to remain. Time will tell how these multinationals will continue to view the UK in comparison to other countries within the EU and beyond it.

So this being a tax publication, let's consider the tax implications, of which there are many. First off: VAT, which is the only tax substantially harmonized under EU law.

There are positive and negatives to Brexit where VAT is concerned. On the one hand, it allows the Government to break free from the VAT Directive, which imposes minimum standard rates and various restrictions on what goods and services can be subject to reduced rates. In theory, once the VAT Directive no longer applies, the Government could set UK VAT rules in any way it sees fit. However, it is difficult to say whether this will be a blessing or a curse for VAT payers. Simpler VAT rules and lower VAT rates would be welcome of course. But would it be a double-edged sword? The more the UK VAT diverges from EU rules, the harder it will be for cross-border traders to reconcile UK VAT with EU VAT. Some commentators are suggesting that the UK Government's best option is to continue shadowing EU VAT rules.

It must be assumed that another important piece of EU legislation, as far multinational groups are concerned, the Parent Subsidiary Directive will at some point in the future no longer apply in the UK. This is significant because the law ensures that intra-EU dividend distributions from parent companies to their subsidiaries are not taxed twice. What sort of arrangement, if any, will replace it?

Taxpayers are also wondering about the validity in the UK of past rulings from the European Court of Justice, which have resulted in many changes to UK legislation. Add that to the reams and reams of EU legislation and regulation that has been transposed into UK law over the last 40 years. The idiom Gordian knot springs to mind.

In theory, if the state aid rules no longer apply to the UK, it would be able to do such things as give tax exemptions to its ailing steel industry, or boost impoverished regions by setting up special economic zones. But this isn't a given: it may depend on the UK's future legal ties with the EU. Iceland, Liechtenstein, and Norway aren't part of the EU, but as members of the European Economic Area they are bound by many of the EU's laws, including those on state aid.

If the UK finds itself outside the Single Market, British companies will have to contemplate taxes that have long been forgotten about by intra-EU traders: tariffs. The issue of the UK's future trading relationship with the EU was one of the most vexed in the referendum campaign. Brexiteers argued that even if the UK is kicked out of the Single Market, it will not be in the EU's interests to "punish" Britain with an unfavorable trade agreement, since the UK has a substantial trade deficit with Europe i.e. the EU exports relatively more to Britain. This issue won't be solved overnight, but what's certain is that with membership of the Single Market, the UK will need to adhere to at least some EU rules.

About the Author

Kitty Miv, Editor

Kitty was born in Argentina in 1960 to a Scottish cattle rancher and his Argentine wife. Educated in Edinburgh and at Princeton, Kitty worked for the World Bank as an economist, where she met and married an emigre Iranian banker. During her time with the Bank, Kitty worked in a number of emerging markets, including a spell in the ex-USSR as a Transition Economies Team Leader. Kitty is now a consultant in Brussels and has free-lance writing relationships with a number of prominent economic publications. kitty@lowtax.net


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