The vote to leave the European Union has triggered a period of uncertainty for the UK economy. The UK’s future relationship with the EU will not be clear for some time.
Community law currently affects national taxation in several ways and the implications for business tax will depend on the outcome of the negotiations between the UK and the EU.
In the days after the vote, former Chancellor George Osborne, looking to mitigate the potential risks of leaving the EU, trailed a cut in corporation tax to 15% or less. The new Chancellor Philip Hammond has not committed himself to this but intends to focus on measures to boost business investment and securing the ability of the financial services industry to do business in the EU. The Autumn Statement on November 23rd may present new opportunities.
The UK hasn’t formally left the EU yet and will only do so sometime after Article 50 is triggered. Constraints on some tax changes may then be removed. Speculation that the UK might abolish VAT is almost certainly unfounded. VAT generated £115 billion last year, which would be difficult to replace, and the continuation of VAT is likely to be a prerequisite for UK access to the European single market.
The extent to which UK VAT might diverge from EU VAT law, for example by extending the zero rate, is uncertain. Changes to the rules for supplies made to or from EU member states will probably be needed, and companies that sell directly to EU consumers may have to set up warehouses within the EU to continue to benefit from the current rules.
Leaving the EU should remove the prohibition state aid to business, making it easier for the government to provide tax incentives. Customs procedures and duties may be imposed on businesses trading with the EU if the UK leaves the EU customs union without entering into a free trade agreement.
Although direct taxes are under national control, the government does currently have to ensure that corporation tax rules are consistent with EU law and the principle of fiscal neutrality. Outside the EU, a government might wish to favour UK companies fiscally. On the other hand, EU governments might discriminate against them.
Much could remain the same if the UK joins the European Economic Area. Structural change to UK tax is likely to be slow. We will keep you informed so that you can make best use of the opportunities that may arise and mitigate any difficulties.