Tax Implications of Brexit by Rebecca Cave

The people of the UK have voted to leave the European Union. The result of the referendum doesn’t change anything immediately, as the terms under which the UK divorces from the EU must first be negotiated between the UK and the other 27 member states.

This period of negotiation is triggered by notification under Article 50 of the Lisbon Treaty, and only the UK can do that. However, when David Cameron announced that he would resign as Prime Minister, he also said that it will be up to his successor to start the EU exit negotiations.
Those negotiations will last for at least two years, and possibly a lot longer. It is only at the end of that period that the EU treaties will cease to apply to the UK, and the UK will effectively no longer be a member of the EU.

The direct effect on the UK tax system will be largely confined to VAT and to a lesser extent certain excise duties, as the rules for those taxes are determined on an EU-wide basis. However, other parts of the UK tax system will be effected indirectly in the short and long term as outlined below.

Short term

The Government has been thrown into disarray by the resignation of the Prime Minister, although that is not due to take effect until a successor is appointed, probably in October. Note that this process takes place entirely within the Conservative party; there is no requirement for a General Election to be held.

While MPs jostle for the top positions, big tax changes may be put on hold until the new Cabinet is appointed. These include the major reform known as ‘Making Tax Digital’. The passing of the 2016 Finance Bill, which is currently before Parliament, may also get delayed.
While campaigning for the Remain vote in the EU referendum, Chancellor George Osborne threatened to hold an Emergency Budget if the result was to leave the EU. So we should now expect another Budget, but possibly not before October, as such things take months to plan.

In the meantime, a VAT rate change required by the European Court of Justice (CJEU) appears to have disappeared from the legislative timetable. This ruling was to raise the rate of VAT from 5% to 20% on the installation of solar panels and similar energy-saving equipment, to be applied from 1 August 2016, but this may not happen. There are other CJEU rulings in the pipeline, and the UK should, in theory, apply those rulings in the period before it finally divorces from the EU.

Long term

After the UK ceases to be a member of the EU it is likely to keep VAT in some form, as it accounts for around 17% of all government receipts. However, the UK would have the power to extend the scope of zero rating and VAT exemptions without the fear of a referral to the CJEU. This would allow the UK Government to use the VAT rules for its own political ends, perhaps by introducing exemptions for particular supplies, such as domestic fuel. Such special treatments would certainly complicate the tax.
International businesses who have a base in the UK in order to access EU markets may wish to relocate their operations to another country which is within the EU.

UK-based businesses will no longer have to complete intrastat returns to record the movement of goods within the EU, and the EC sales list will be irrelevant.

VAT MOSS will still apply to UK businesses selling digital services to non-business customers in EU, but UK businesses will have to apply the rules on the non-EU basis. This is likely to make the system more difficult for small businesses to operate.

Currently it is quite easy to recover overseas VAT on business expenses incurred in other EU countries, through an online portal operated by HMRC. UK businesses are unlikely to be able to access this EU-wide system after Brexit.

The UK Government will no longer need to seek EU approval in respect of state aid on tax incentives such as R&D tax credits, patent box, EIS and SEIS. This will allow the Government to expand and add to those tax incentives to attract investment into the UK.

Rebecca Cave

Written by Rebecca Cave

Rebecca Cave is a chartered accountant and chartered tax adviser, whose primary role is consultant tax editor at She also writes newsletters for various other publishers and edits Bloomsbury's Tax Rates and Tables.

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