How does the Brexit affect UK Tax?

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March 25th 2017
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How does the Brexit affect UK Tax?

On June 23rd people will be able vote for the UK to remain in or exit the EU. Here we briefly analyse the effects of a possible exit on taxation within the UK.

How does the Brexit affect UK Tax?

European Union : A Background

The EU is a congregation of 28 countries within Europe arising from the post-WW2 need to create an economic partnership in order to avoid possible future conflicts. The single market now allows members within it to move freely, adopt a single currency called the Euro (currently used by 19 of the 28 countries) and have a centralised parliament.

The parliament is a major source of the need for a referendum on leaving the EU. After winning the 2015 general election, current PM David Cameron kept his promise of allowing the public to vote on staying in the EU under the growing sentiment that this EU parliament was setting rules and laws that were exceeding the acceptable level of impact on day-to-day issues. The EU sets laws on a broad range of issues from transport, rights and the environment. The UK contributes 12.57% (Source: HM Treasury) to the cost of running the EU with Germany contributing 21.36%, France 15.72%, Italy 11.48%, Spain 8.06% and the remainder split amongst other member states. In 2015 the 12.57% equated to around £8.5 billion, this includes the rebate (due to agricultural subsidies that are not really significant enough to the UK).

Right, so that's a quick background to the EU - but what are the effects of leaving on UK taxation? Well, there are both direct and indirect issues to discuss and without knowing what terms the exit will be negotiated under makes forecasting a little difficult. In purely trade terms the UK could maintain some kind of membership but withdraw completely from other aspects.

Broken down into categories of taxation we have:

  • Companies

    VAT and Corporate taxation are the biggest hit. VAT currently is a mix of EU and UK legislation contributing 20% of UK total tax revenue. After a possible short period of maintaining the current rules and regulations the Government will probably move to create a UK sales tax to replace VAT. The change would allow updates to rates applicable and maybe the categories of goods and services liable to the sales tax would change from what is currently applied.

    Cross-border transactions between EU and UK businesses would end up having increased costs dues to application of differing sales tax systems particularly access to the EU 'one-stop shop' currently removing the need to register for VAT in all EU member states.

    Maintaining the corporate tax system to remain somewhat aligned to EU law, especially if some trade agreement is to continue, is a possibility. If the corporate tax system is changed too much to benefit UK companies this may create issues with multinationals locating themselves in the UK.

  • Income Tax

    Domestic taxes should not be directly affected by a Brexit, but there are indirect issues that could force changes. Recently George Osborne stated that changes to free movement policy within the EU would lead to a cut to net migration into the UK by 100,000. The effect here would be on UK business reliant upon low-skilled labour and this would have the possible affect of requiring an increase on income taxes. The total affect was reported as a loss of £36 billion in net tax intake and equivalent to increasing basic rate income tax to 28% or increasing any new VAT-replacement to 27%.

The vote for leaving the EU takes place Thursday 23rd June 2016.