Brexit Outlook: Unknowns Lie Ahead for Planners(1)

Trust Bloomberg Tax for the international news and analysis to navigate the complex tax treaty networks and global business regulations.

By Penny Sukhraj

Dec. 13 — In three months, Article 50 will begin the U.K.'s amputation from Europe.

Looking ahead to 2017, the picture on the British side of the Brexit negotiations, fraught with threats from European politicians that the U.K. won't have an easy time after the exorcism, remains partly blank.

Companies and their tax executives need to grapple with the fact that all they know now is that there are many unknowns in what lies ahead post-secession.

Britons in June narrowly approved a referendum calling for the U.K. to leave the European Union, and Prime Minister Theresa May announced in October that the U.K. government will formally begin the two-year process of leaving the EU by the end of March 2017.

A spokesman for Her Majesty’s Treasury said the U.K. will have all of the rights, obligations and benefits of EU membership until the point that it leaves the bloc. “Arrangements for how the UK will exit the EU will be subject to detailed negotiations, commencing once Article 50 is triggered,” the spokesman said.

So where does tax planning begin and what are the key issues that have to be considered and factored in when contemplating the divorce from the single market?

Parent-Subsidiary Directive

Senior tax accountant and academic Richard Murphy, frequently quoted when on the campaign trail for tax justice and transparency, said risk analysis is essential in the first three months of 2017, ahead of the Article 50 axe.

Tim Sarson, a tax partner and value chain specialist at KPMG, told Bloomberg BNA the only really difficult corporate tax change that a hard Brexit brings about is the loss of the parent-subsidiary directive.

“There have been a few companies and funds that, for example, in the past may have used Dutch or Luxembourg holding companies in their structure, but they have now started using the U.K. more, they’re now defaulting back to what they used to do,” he said.

In fact, McDonald's Corp. announced Dec. 8 it will move its headquarters from Luxembourg to the U.K., creating a new international holding company based in Britain—an apparent vote of confidence in the U.K.'s post-Brexit direction.

The new company will be responsible for most of the royalties received from licensing McDonald’s intellectual property rights outside the U.S., and it will pay U.K. corporate tax.

VAT Challenges

Changes to the U.K.'s value-added tax system could be delayed into 2020 after Brexit, and it is unlikely a new system would diverge far from the existing regime, tax practitioners have told Bloomberg BNA. Still, U.K. businesses expect VAT and other tax compliance issues to become more complex as the U.K. switches out of a tax regime governed by EU single-market directives.

The U.K. currently implements its VAT laws based on the 28-member bloc’s VAT Directive, which sets the standard rate of VAT at 15 percent and requires U.K. courts and tribunals to apply VAT in accordance with the directive and EU case law. The directive will no longer be considered binding for the U.K. at the point of exit from the EU.

Corporate Britain’s uncertainty has seen the bankers’ frontman, the City of London Corporation, create much noise over the 71.4 billion pounds ($90 billion) in taxes they paid during the most recent fiscal year, the most since before the financial crisis. London employs more than a million in the financial services sector, 3.4 percent of the U.K.’s workforce.

But this 11.5 percent in contribution to government tax receipts is just part of the tax story. According to PwC, indirect taxes—which companies collect on behalf of others, such as income tax collected under “Pay As You Earn” (PAYE), employee tax and national insurance contributions—are 1.27 times the size of direct taxes, such as corporation tax and the bank levy.

For every 1 pound ($1.26) of corporate tax paid by financial services companies, there is another 6 pounds in taxes collected. Employees’ income tax and NIC deducted under PAYE are the largest taxes collected, and together represent on average 65.4 percent of the total taxes collected. Further, indirect taxes such as value-added tax—governed by the EU VAT Directive—and customs duty will undoubtedly be subject to future legislative changes upon secession.

Expanded Knowledge Base

The reality is that businesses should be “prudent” and expect and plan for a “Hard Brexit” with little by way of tailored carve-outs for Britain, a Big Four indirect tax partner told Bloomberg BNA on condition of anonymity.

Tax directors may have to expand their knowledge base, as indirect taxes such as tariffs take on greater importance.

For example, there is likely to be a negative impact for cross-border businesses due to extra administration at re-established border controls, likely slowing down supply chains. Tax directors who have traditionally left this up to the logistics departments in their companies will now have to consider customs duty issues as part of their tax strategy.

So despite the many changes, and new ways of looking at the U.K., in 2017 tax planners will have to continue to do what they have always been good at—planning for the costs of doing business in a changing world.

To contact the reporter on this story: Penny Sukhraj in London at psukhraj@bna.com

To contact the editor responsible for this story: Cheryl Saenz at csaenz@bna.com

Copyright © 2016 The Bureau of National Affairs, Inc. All Rights Reserved.

Request International Tax