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Press release

The taxing questions surrounding Brexit

Peter Legge Peter Legge

With exactly 30 days to go until Northern Ireland joins the rest of the UK in going to the polls on Europe, business journalists, commentators and analysts are still working overtime to gauge what the result will be.

A new poll announced at the end of last week suggests that 55% of people in Northern Ireland who intend to vote in the EU Referendum will choose to stay. The survey also showed that 23% want to leave, while 22% are still undecided.

Impact on NI

One thing most commentators tend to agree on is that Brexit potentially impacts Northern Ireland more than other regions in the UK, given that we are the only part of the UK that shares a land border with another EU member state.

With the NI Executive securing a reduced 12.5% rate of corporation tax from 1 April 2018, in seeking to ‘level the playing field’ with Ireland and to promote economic growth in the private sector, what now are the possible tax implications and impact on businesses of a vote to leave the EU?

The implications of such a vote are largely dependent on what alternatives the UK is able to negotiate. If forced to re-negotiate agreements from scratch and alone, then it could take many years.

The period of uncertainty, created by such a delay, could see businesses faced with the potential loss of free movement of goods within the EU, thus increasing both cashflow (no relief for import VAT) and costs (duties).

Although the setting of direct tax matters remains within the competency of each Member State, they must heed the fundamental EU freedoms which state that the tax rules should not hinder the free movement of goods, capital, people, businesses and services.

Exiting the EU would remove the requirement for these freedoms to be adhered to, although there are many areas of UK tax law (such as the UK group relief rules) which have incorporated these freedoms and would remain.

EU Directives

Another direct tax matter to consider is the fact that there are a number of EU Directives which provide for reduced tax burdens within the internal market. For example, the Parent/Subsidiary Directive exempts dividends paid by an EU subsidiary to its EU parent from withholding tax, while the Interest and Royalties Directive eliminates withholding taxes on interest and royalty payments between EU related group companies.

If the UK voted to leave, it would no longer benefit from these exemptions. This could be a real cost - for example, a UK parent company may well find itself subject to a withholding tax on a dividend received from an EU subsidiary and as such dividends are usually exempt from UK tax, there would be no way of getting relief for the additional foreign tax suffered.

Of course in looking at indirect tax matters, VAT is a European Tax and so currently the UK’s VAT legislation must be directly in line with the EU Principal VAT Directive. EU tax payers are able to rely on EU law and European Court rulings; however a Brexit vote could leave us assuming that these rulings will no longer be binding.

Exiting the EU could also eliminate the cross-border personal shopping allowances for duty paid excise goods, replacing it with a much smaller duty-free allowance for travellers, most likely similar to non-EU travellers.

Conclusion

Essentially, the tax implications of a Brexit for Northern Ireland will depend on what other arrangements the UK is able to negotiate post-exit. In the longer term, the UK is likely to be keen to access some of the same tax advantages it currently enjoys.

It may be the case, therefore, that the tax position ends up similar to current arrangements. How the UK goes about achieving these – on its own or through a wider collective such as the European Free Trade Association – could impact on the speed with which any new rules could be negotiated and implemented.