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June 17 — If Britons vote to leave the European Union on June 23, uncertainty over value-added taxation and likely changes to the tax compliance framework could prove complicated for companies with U.K. ties that trade within the 28-nation EU bloc.
As the tide turned in a week in which the “Leave” campaign surged ahead in polling, tax practitioners have cautiously begun discussions with concerned multinational corporate clients.
The concerns over Brexit tax implications are reflected in a new analysis of the Financial Times-Stock Exchange 100's 2015 annual reports, by advisory firm Global Counsel. The analysis, issued June 14, shows that most senior business leaders consider Brexit the most serious political risk their global corporations face.
Lloyds Banking Group Plc indicated in its report that a British exit would affect investment plans, London Stock Exchange Group Plc warned investors of market volatility and HSBC Holdings Plc expressed concerns about “a disorderly exit” that could force changes to its operating model and affect its ability to access the European Central Bank and high-value euro payments, as well as transaction volumes, due to possible disruption to global trade flows.
At the same time, French politicians have already rolled out the red carpet for British bankers worried about a potential Brexit. Migration of the banking sector could see Her Majesty's Revenue and Customs lose its 4.5 billion pounds ($6.4 billion) in VAT revenue to French coffers.
Tax practitioners say U.K.-based companies trading within Europe would need to consider the U.K.’s change in status from “EU” to “non-EU” jurisdiction, and the subsequent legislative amendments to follow with third parties to replace existing treaties that would no longer apply.
Trade and transactional processes would undoubtedly hit the U.K.’s international exports to EU countries, worth 229 billion pounds in 2014 according to the U.K.’s statistics agency, while foreign direct investment (FDI) from the EU was 46 percent of a total of 977 billion pounds of inward FDI for 2013—of which the U.S. contributed 262 billion pounds (26.8 percent).
VAT matters are expected to become more complex because VAT is a fully harmonized tax in the U.K. governed by EU VAT directives and regulations, as well as decisions from the Court of Justice of the European Union, whose decisions would also immediately cease to be binding from the date of secession.
Deloitte U.K. tax partner Daniel Lyons said that on a day-to-day transactional level, companies would be expected to revise their invoicing and reporting protocols for cross-border services and supplies, and would have to reconsider the impact on VAT accounting under the EU's “mini one-stop shop” regime.
In addition, companies would have to negotiate EU import VAT and customs duties that would be levied on “non-EU” traders, due to the loss of the intra-community trading status and zero-rating of business-to-business sales of goods and services within the EU, because U.K. transactions would be reclassified as “imports.”
In an analysis of the impact of Brexit on VAT and customs duties, Julie Park, managing director of the independent VAT Consultancy, warned that customs levies overall would be far more complex.
Even though the U.K. could choose to adopt a new Union Customs Code (UCC), which would mirror international customs law application by the U.K. to join country groups with beneficial trade agreements such as the European Economic Area would still require negotiations, since “there is not automatic right of entry.”
“Customers importing goods overseas from the U.K. wouldn't be able to apply ‘EU origin’ preferential duty rates, meaning the cost of the goods in the supply chain increases, impacting pricing and profitability,” Park said.
The complications could spur an escalation in tax disputes between taxpayers and HMRC, Lyons said, even after secession, since “some transactions will predate it, where EU law will still be in point.”
That leaves the prospect that the U.K.’s tax tribunals and courts would interpret only U.K. provisions and might have little regard for decisions emerging from the CJEU. But this could be awkward, because U.K. VAT law will still have its roots in EU law, which makes it unlikely the courts and tribunals would simply ignore existing and future CJEU case law when applying U.K. provisions.
The debate, Bill Dodwell,, Deloitte U.K.'s head of tax policy said, is now about how U.K. law would interact with EU VAT law, which would effectively dissipate for the U.K.
“You will end up with a curious situation in the intermediate period in which courts look at previous decisions of EU law, to the extent it is helpful but not binding and determinative—but Parliament will be supreme,” Dodwell said.
After two years of transition, the U.K. would technically be free to completely overhaul its VAT rules.
“Would it zero-rate products? Would it keep the current VAT system which brings in 115 billion pounds, the third biggest tax in terms of revenue? It's unlikely to get rid of it,” Lyons said.
Park said she expects that the nature of CJEU decisions being persuasive but non-binding would be of particular interest to financial services and insurance companies, who in recent years have challenged the U.K.’s broad VAT exemption for insurance-related services.
“The pressure to adhere to an EU-wide scope for the exemption would be removed by a Brexit. Clearly, the removal of EU ‘constraints' would need to be measured against the requirement to maintain revenues, or more likely plug revenue gaps in the event of a downturn,” Park said.
In addition to multiple VAT registrations, companies would also need to consider import and export declarations, typically processed by third-party freight agents, who Park expects would want to “levy additional charges for completing additional declarations” that come with the additional compliance.
Companies would also need to spend money to change their systems, she predicts, “to ensure accurate VAT reporting and to ensure transactions are taxed correctly” if this is impacted by a change in an EU-versus-non-EU “flag” to denote the U.K.’s status.
PricewaterhouseCoopers' U.K. tax partner Alex Henderson said he expects that while an initial exit would provide the opportunity for the U.K. government to be flexible with its VAT rates, this would eventually cause litigious issues for businesses.
“Businesses operating across Europe would have to deal with VAT and whatever replaced VAT in the U.K.—so you're going to get mismatches and points that have to be litigated,” he said.
An exit could give the U.K. government more scope to introduce tighter rules, but it also would bring more complexity, as players would need to work out how to move from old to new rules, and determine which rules would be grandfathered.
Ultimately, the government would have greater scope to create legislation that continues to support businesses, but entering the European Economic Area zone would still subject it to state-aid rules, and being out of the EU would mean the U.K. falls outside EU plans for an EU-wide common consolidated corporate tax base with respect to harmonization and collection of tax
But Henderson said trading across Europe would be impacted by such plans.
“There's currently tension with the U.K. tax system. The government is trying to maximize its revenue yield and at the same time needs to ensure that Britain is open for business,” Henderson said. “A balance has to be struck, as EU laws can still constrain what the government does as well. There are very narrow parameters of what the government can actually do.”
The June 16 shooting death of a member of Britain’s Parliament has spurred the pro-exit and pro-stay campaigns to suspend activities, but the June 23 vote remains on track.
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Global Counsel's analysis of the annual reports of the FTSE 100 is at https://www.global-counsel.co.uk/sites/default/files/special-reports/downloads/Global_Counsel_Dealing_with_political_risk_what_the_ftse-100_have_to_say_0.pdf.
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