Digesting Brexit: What’s next after historic UK vote to leave the EU?

As we digest the news of the United Kingdom’s historic exit from the European Union (EU), we should consider the impact this has on the global business and tax landscape. EU and world leaders are discussing an orderly exit for the UK in light of the dynamic political climate. With this unprecedented event comes uncertainty, but what we can expect is change to the regulatory, trade, and tax environments in the UK and its former EU partners. While the UK will continue to be an attractive destination for investors, tax rules will need to be closely followed as the benefit of EU directives may no longer be in place. What also will be closely watched is how and whether the UK will harmonize its tax laws to the various initiatives of the EU, such as the base erosion and profit shifting (BEPS) project, which targets aggressive tax planning.

One of the items that US businesses need to consider is how their current tax structure will be affected by inevitable changes to tax legislation in the UK. Tax planning will now need to build in withholding taxes and consider UK group company rules and indirect tax changes that are sure to differ between the UK and EU. Additionally, the tax compliance burden for US businesses operating in the UK and the EU will surely increase. US business will need to consider changes to the value-added tax (VAT) and customs duties in the UK. Accordingly, US businesses that have UK companies will need to revisit their tax structure and ensure they are prepared for the changes.

In the short term, few changes are expected while the secession negotiations take place. Following secession, the UK’s approach to taxation could mirror one of the following alternative existing models:

  • European Economic Area (EEA) membership (the Norway model): The UK would be a member of the EEA, which allows access to an EU single market and accepts the free movement of people.
  • Bilateral agreements (the Swiss model): Most believe this is the likely model and will mean the UK will negotiate bilateral agreements with the EU, which typically offers limited access to the EU single market. However, one sticking point will be the UK’s willingness to accept the free movement of people.
  • Advanced free trade agreement (the Canada model): This calls for limited access to an EU single market and specific rules related to tariffs on manufactured goods and services.
  • World Trade Organisation (WTO) membership (the WTO model): This does not include any preferential access to the single market, however, would include harmonization with EU’s direct tax obligations.

The process for leaving the EU is governed under Article 50 of the Consolidated Treaty on European Union, which provides that a Member State has the right to “withdraw from the Union in accordance with its own constitutional requirements.” While the process should take about two years, a number of EU members have called for the process to be accelerated. For now, we will follow the UK secession closely and await further news from discussions among the other 27 member states.

Conclusion

In this uncertain tax landscape, US businesses should maintain a flexible game plan. We will continue to keep you informed of the latest developments on the UK’s exit from the EU to assist you with your global business and tax planning.

For more information on this topic, or to learn how Baker Tilly tax specialists can help, contact our team.


The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely.  The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.