On 23 June 2016, the ‘Brexit’ campaign prevailed when the UK voted to leave the European Union. Whilst it would take a crystal ball to predict all the tax implications of Brexit, you don’t need to be Mystic Meg to predict some of them. We take a look at five of the most likely tax outcomes.
Following the recent victory secured by the Vote Leave (‘Brexit’) campaign – which won the day by some 1,269,501 votes – we’re left with what the Financial Times has described as “the world’s most complex divorce.” />
But the push from Europe for a celeb-style ‘quickie’ divorce has been tempered by Article 50 of the Treaty of Lisbon, which gives the UK Government two years to implement its decision to leave the European Union (EU). So, an actual exit from the EU is highly unlikely any time before June 2018.
Meanwhile, we’ve witnessed $2 trillion wiped off the global stock market within the first 24 hours post-referendum and over four million people have signed a petition calling for a second EU in-out referendum.
Beyond stock market and currency volatility, the Brexit vote may not have an immediate impact. So, now is as good a time as any to consider five key tax implications that Brexit may have in the future.
1. Income tax
Just before the referendum, Chancellor George Osborne warned that a Brexit vote could result in tax increases – specifically a 2p rise on the basic tax rate (currently 20p in the pound) and a 3p rise in the higher tax rate (currently 40p in the pound).
2. Inheritance tax
The Chancellor didn’t stop there. He also indicated that an increase in inheritance tax might be on the cards – rising from 40p to 45p.
3. Value Added Tax (VAT)
Since VAT has its roots in Europe, all UK VAT legislation must comply with the EU Principal VAT Directive.
Until now, taxpayers could rely on EU law and European Court decisions. But once the UK’s exit from the EU has been formalised, previous European rulings will probably no longer be binding.
During the referendum, Brexit campaigners signposted their intent to remove the five per cent VAT charge on domestic fuel, which is currently required by the EU. But there’s more chance of a heavier impact on VAT for cross-border transactions within the EU. For instance, at the moment, under EU rules, no VAT is imposed on cross-border supplies of goods (or business-to-business services) from the UK to another EU member state.
4. Customs duties
When the UK finally leaves the EU, it will relinquish membership of the EU Customs Union, paving the way for EU customs duties to apply to imports from the UK. This will, in turn, make sourcing goods from the UK less appealing to EU firms and consumers.
Likewise, the Government may broaden the scope of the UK customs duty tariff to include imports from the EU – hiking up the costs for UK companies that are heavily dependent on receiving goods from EU suppliers.
5. Excise duties
The personal shopping allowance for duty paid excise goods may be removed and replaced with a duty-free allowance akin to that enjoyed by non-EU travellers.
Once the UK leaves the EU, the Government will be able to vary excise duties without being constrained by the EU.
Article 50: the next step
A member state leaving the EU is very much uncharted territory.
That said, Greenland – a Danish overseas territory – did hold a referendum in 1982 and voted (by a strikingly similar 52 per cent to 48 per cent) to leave the EU’s predecessor, the European Economic Community (EEC).
After a three-year period of negotiation, Greenland quietly made its way out of the EEC in 1985 and, according to its former Prime Minister, Kuupik Kleist, the country hasn’t looked back since. But even Greenland didn’t invoke Article 50. (The Lisbon Treaty didn’t come into force until late 2009.) In fact, no country has ever triggered Article 50 – until now, that is.
So, for all intents and purposes, the UK will be a guinea pig – a test case – and all eyes will be on its negotiations with the EU to see how they pan out. What will the agreements that govern UK-EU relationships look like post-Brexit? As with any divorce, the Government won’t necessarily get what it wants or deserves – it’ll only get what it can negotiate.
What is clear is that history teaches us that the flexibility of freelancers and contractors means they are less susceptible to market and currency instability (take the 2008 recession, for example). In this period of uncertainty, many corporations will be minded to put a freeze on fixed costs, such as recruiting permanent staff, in favour of taking on a temporary workforce. So, every cloud has a silver lining.