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BREXIT – UK VAT and potential tax opportunities

Date26 Apr 2017

The concerns around Brexit has been dominated by the potential negatives and uncertainties facing the UK economy as it arranges to leave the European Union. This has been compounded in recent weeks but the probability of a ‘hard’ Brexit, with UK companies facing restricted access to the EU’s Single market, Customs Union and immigrant workforce, which has strengthened the UK’s comparative strong economic performance in the past four years.

Nevertheless, the UK will gain a variety of new freedoms to its advantage when it leaves the EU – now likely to be March 2019. These will include, more control over tax policies, which are presently set or profoundly influenced by EU directives and rules. These are highlighted below.

EU VAT – leaving the regime

The EU VAT Directive no longer requires to be followed by the UK. This will afford more control on the setting of reduced VAT rates over a variety of products and services. For example, the UK could investigate introducing a new variety of consumption taxes not allowable by the EU. Or, the UK can explore extending VAT to the presently exempt financial services. Another possibility could be the unification of the exiting Insurance Premium Tax into the UK VAT system, providing a cost-saving simplification.

Escaping ECJ rulings

The UK could also no longer be subject to the VAT decisions of the European Court of Justice (ECJ). Some examples of where this might benefit the UK include:

  • Many judgements on domestic-only direct tax group relief which had benefited national businesses over foreign entities could be ignored by the UK
  • The UK could gain on compensation payments on compound interest litigation – the ‘Littlewoods’ case
  • The UK could apply pressure to implement the 2005 Anderson ECJ ruling commanding irretrievable back-office business. This should help entice and preserve international insurance companies looking to make evade input VAT losses in the remainder of the EU.

Evading EU State Aid investigation

The European Commission (EC) is progressively using EU State Aid guidelines to limit complimentary tax advantages and decisions given to corporations by EU Member States – specifically where used to lure multi-nationals to relocate. The UK came under substantial pressure two years ago to restructure its highly successful ‘Patent Box’ tax rule which the EU considered too aggressive in enticing patent-related investment from other EU Member States, for example.

Nevertheless, the UK may not have a complete carte blanche in this area, as the EU is likely to threaten reactive measures or limitations over EU trade should the UK stray considerably from the EU rules.

Evading additional EU tax methods

Typically, the UK has been the most commanding challenger of several of the EU’s more debatable tax measures, which the UK considered out of line with its own tax liberalising agenda. For example, the Financial Transaction Tax and the synchronisation of EU corporate taxes (Common Consolidated Corporate Tax Base – CCCTB).

After Brexit is implemented, the UK will no longer have to lead offhand opposition to these suggestions, and not risk their obligation on UK businesses.

If you have any queries or questions, please do not hesitate to contact amavat Europe.

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