Key Takeaways
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Leading Women in Tax Forum, London – Key takeaways Brexit: The post-Brexit tax system Erika Jupe, partner, Osborne Clarke Kelly Stricklin- Coutinho, barrister, 39 Essex Chambers Anneliese Dodds, member of parliament, Oxford Labour The panel focused on: The EU’s traditional influence on UK tax; Where we are in the withdrawal agreement; The harmonisation of VAT; Customs requirements post-Brexit; Dealing with disputes; M&A; and How the UK can stay competitive. The EU’s traditional influence on UK tax The EU’s most significance influence is on VAT – a requirement of membership. Other areas of traditional influence, which are often more hidden to the public, include: The EU’s push for harmonisation to promote the single market; The EU’s Code of Conduct Group’s (Business Taxation) work on tackling harmful tax practices; and Requirements around withholding tax, accounting principles and implementing the OECD BEPS measures. Unfortunately, recent scandals, such as the Panama Papers, has led to wider EU action and things like the EU tax blacklist. Where we are in the withdrawal agreement There was very little debate on tax within the withdrawal bill, but the bill has now passed. When there has been discussion about tax, generally it’s been focused around the topic of customs and whether we would be part of the VAT area or not. The customs bill is likely to be discussed in Parliament before the summer recess. There has been a very limited conversation on VAT. Much more considered discussion is necessary. Although it is hoped that it will happen when the bill is discussed in Parliament, government may rush the bill through. In terms of the withdrawal agreement, while VAT policy has been agreed, the details have not – and the devil is in the detail. VAT Considering VAT accounts for 20% of UK revenues, it is surprising how little air time VAT matters have received. But, this poses the question of whether the lack of VAT discussion is intentional. According to the agreement that has been negotiated with the EU, the provisions, at the moment, say that the UK will stay very harmonised with the EU for the transition period and for the next five years after the transition period. If that’s maintained, we could see a significant amount of harmonisation. Where alternative discussions have taken place, the focus has been on direct VAT costs if there is no harmonisation. But there has been little discussion on indirect costs if the rules were significantly changed. Any change in the VAT rules, however, will require significant investment in the necessary infrastructure – and there has been no mention of whether that is feasible or possible in the timeframe and where the money for that would come from. This is unlikely to happen in the near term. However, little change now doesn’t mean VAT will remain the same for long. If the government were to change the VAT rules in the long term, it is hoped that this could offer an opportunity for deeper discussions on the tax and a chance to make some changes, as well as allowing businesses a chance to adequately prepare for any changes. It is hoped that the lack of discussion and silence on VAT matters is a sign of there being very little change to VAT rules immediately after Brexit, and in the near future. Either way, at the moment, it’s difficult for businesses to plan for any possible VAT changes. However well the system is dealt with in the next few years, there will be bumps in the road. Customs Customs is an area where we have had the most debate, but the least clarity on what the outcome is going to be. There seem to be three main options on the table: 1. Do nothing and stay in the customs union. 2. Enter into some type of new customs partnership – the government’s favourite approach. This seems to have the benefits of an external border around the whole of the EU plus the UK. The UK would act as a collection agent on behalf of the rest of the EU in picking up tariffs and customs duties, etc. and passing them onto the other jurisdictions. This option seems to be quite radical though. It’s not clear if the EU is on board with it. It’s also a novel proposal. 3. Max facilitation – separating the UK from any customs union. This is simply by using technology to smooth borders, but it would not solve the Northern Ireland issues. The conversation about customs matters has primarily focused on goods, but little attention has been given to the impact on services. The UK government is going to put in place a new Customs Declaration Service (CDS). The idea is to comply with legislative requirements that were established before the UK voted to leave the European Union. However, the National Audit Office’s latest report shows how badly this has gone. The system has not identified the users yet and therefore there are questions over how it will work when it comes into force and whether it will be ready in time. Having a customs border will mean more costs for businesses, which are likely to be passed onto consumers. The short transition period poses another problem. Dealing with disputes In the last few years there has been a significant impact on UK taxation as a result of litigation – generally group litigation – about whether or not the UK’s corporation tax law is compliant with EU fundamental freedoms. For example, this was questioned in the Marks & Spencer case and the franked investment income (FII) group litigation case. The latter involves almost all areas of corporate taxation, including dividends, control shareholding, portfolio shareholdings, aspects of group relief and loss relief, thin capitalisation, transfer pricing and CFCs. Key questions are what happens to the law in that area after Brexit and is the government likely to change it to go back to its previous discriminatory practices? The likelihood is that it won’t revert to the old rules for now. Little is likely to change in terms of litigation in the first few years post-Brexit. This is because UK laws are very much aligned with EU rules. However, for matters that are argued in the UK courts, we could see some retrospective claims potentially be implemented. Many taxpayers currently litigating matters involving EU laws are trying to get these resolved before the transition period ends. The UK and EU will need to implement a mechanism to deal with UK-EU disputes, which may be a tricky one to resolve. While the ECJ has been seen as the villain at times, one thing that will be missed post-Brexit is its issuance of opinions on matters that don’t get litigated. While the ECJ’s jurisdiction may end, the EU are keen to tie the UK to the European Court of Human Rights (ECHR). Although the ECHR rulings do not impact heavily on tax, the principles apply. As such, with no ECJ jurisdiction, the ECHR could play a larger role. On state aid, the EU’s state aid rules will apply until transition. The UK can apply its own state aid rules post-Brexit. The withdrawal agreement is likely to include provisions on state aid benefits/subsidies. Whatever happens with ECJ jurisdiction, if the UK remains very close to EU law, it will be very difficult for UK courts to ignore what is happening in the ECJ. M&A Brexit shouldn’t have a major impact on M&A activity. Particularly because a number of international tax rules are converging. The BEPS process is leading to more standardisation. As such, most developed nations are quite aligned. One area where there may be a difference is whether the UK will still be seen as a holding company jurisdiction. Over the past couple of years, there have been a number of measures that have been brought in to make the UK more attractive to holding companies, such as the dividends exemption, as well as being within the EU. This helps with the UK being able to take advantage of certain rules, such as the Interest and Royalties Directive, the Parent-Subsidiary Directive and also the Mergers Directive. There has been hardly any mention of what the impact of Brexit is going to have on those provisions. If the Parent-Subsidiary Directive ceases to apply, holding companies would have to rely on double tax treaty provisions, including the rates herein for withholding tax, dividends, royalties and interest. But, this may not be beneficial for all companies as not all DTAs offer a 0% benefit on dividends, for example in the Germany-UK DTA. This could be damaging to businesses based in the UK or with operations in the UK. If we cannot harmonise UK rules with EU directives, there is a risk that there could be a tailing off of the UK as a holding company jurisdiction post-Brexit and UK-based M&A activity could slow. How to stay competitive The UK leaving the EU has brought a focus on taxation as potentially an element of competitiveness, arguably motivating the corporate tax rate cuts – something that has not been positively received by some EU member states. In the UK, there is an opening up of conversations around VAT and duties as part of the competition conversation. There is unlikely to be a VAT rate cut for now. But, the topic of regional VAT mechanisms and freeports has been floated. There is a real potential for the UK to become a CFC jurisdiction for other countries.