Impact of Brexit on Tax

Impact of Brexit on Tax

This article considers the models currently in existence which the UK may choose to adopt once it has ceased to be a member of the EU whilst also considering the likely impact on direct and indirect taxes.


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On 23 June 2016 the UK voted to leave the European Union (“EU”). Whilst the decision has been made for Britain to exit the EU (“Brexit”), Britain will likely remain part of the EU for up to two years following the time it notifies the European Council of its intention to leave the EU by triggering Article 50 of the Lisbon Treaty. This two year period may be further extended if the European Council unanimously agrees with the UK to extend the notice period.

Although it is difficult at this stage to provide specific details of how the UK taxation system will be impacted by Brexit, the likelihood is that there will not be any immediate change to direct and indirect taxes. The actual tax impact of Brexit will be better understood once terms of any post-Brexit agreement have been concluded with the EU.

Existing models

There are a number of models which the UK may choose to adopt once it has exited the EU. Of the several models available, the UK may adopt one of three models currently being used by various non-EU countries who interact with EU member states.

Alternatively, it may also be the case that the UK seeks to enter into its own separate agreements with the EU rather than adopting one of the already existing models however, it is likely this would result in a long period of negotiation.

Recent comments made by the UK Prime Minister suggest that it is most likely the UK Government will opt to adapt an existing model rather than adopt the terms of an already existing model. 

Three of the existing models which could be adopted by the UK include the following:

The Norwegian model

Being a member of the European Free Trade Association (“EFTA”), Norway has access to a network of global free trade arrangements. Norway are also eligible to be party to the European Economic Area Agreement resulting in Norway being included in the EU single market. As a consequence of being an EFTA member, Norway must comply with EU rules and restrictions including the four fundamental freedoms: movement of goods, workers, capital and services.

The Swiss model

Switzerland are also a member of the EFTA Agreement however, unlike Norway, they are not party to the EEA Agreement. Switzerland instead has a regularly updated bilateral agreement which it uses to (partially) access the EU single market. 

WTO Model

This model will be the default outcome if no other model is successfully negotiated. Under this model, the UK would apply WTO tariffs on imports and exports from and to the EU. EU member firms would also apply the WTO import and export tariffs when trading with the UK.

The WTO rules do not provide preferential access to the single market or any of the 53 free trade agreements which the EU have negotiated with non-EU countries. The UK are already members of the WTO which is increasingly becoming a forum for harmonizing international trade and business practices. 

Direct taxes

Direct taxes are imposed by UK law and as such, the majority of the UK’s
direct tax law will remain unchanged following Brexit. The UK’s direct tax
rules must however comply with EU laws such as the four freedoms (the free movement of goods, services, people and capital). Post-Brexit, some UK tax law may no longer be required to comply with some EU laws and some EU directives should no longer apply to UK companies.

Directives such as the EU Parent Subsidiary Directive, which provides relief from withholding taxes on dividend payments made between associated companies in different EU states and provides double taxation relief to parent companies on profits of subsidiary companies, will no longer be available. Therefore the UK will need to rely on the double taxation treaties in place to benefit from preferential withholding tax rates.

The EU Interest and Royalties Directive will no longer be available to relieve withholding taxes on royalty and interest payments between UK companies and associated companies in the EU and it will therefore be important for UK companies to explore the extent to which relief from interest and royalty withholding is available under any double taxation treaty.

Although there are numerous double taxation treaties in place with the UK, it may be the case that full relief (for all withholding taxes, whether on dividends, interest and royalties) is not available in some cases.

The EU Merger Directive offers tax relief to cross-border reorganisations. Once the UK has left the EU, the sections of the EU directive relating to EU member shares would no longer apply to the UK and this could give rise to increased tax costs in the UK for businesses undertaking merger transactions.

Indirect taxes


UK law derives from European law. Current EU principles ensure that no UK VAT is charged on cross-border supplies of goods or business to business services provided by the UK to another EU member state.

On leaving the EU, the UK would not have to give effect to the VAT Directive and therefore UK businesses will no longer be required to charge and pay VAT on domestic supplies of goods and services. However, VAT generates a large amount of revenue for the UK Government and it is therefore unlikely the UK Government will repeal VAT or, if VAT were to be repealed, another indirect tax would likely replace it.

Customs duties

EU membership means that customs duties do not apply to trade within the EU and the EU has agreed rates for imports from outside the EU with various non-EU countries. Customs duties are largely governed by EU law and therefore new legislation will be required for transactions the UK enters into with EU member states and also with non-EU member states. 

Excise duties

The UK is currently restricted in its ability to set the rates of excise duties by
reference to given thresholds set by EU directives. Post-Brexit, the UK should be able to vary the rates of excise duties without being restrained by EU law.

Capital duties

Current EU directives imposes a restriction on tax charges by member states on companies raising capital i.e. via the issue of shares. Post-Brexit, the UK would no longer be bound by the Capital Duty Directive and related case law.


Although there are some existing models in place which the UK may use once it has left the EU, there is no certainty on which model the UK will adopt, if any. The post-Brexit tax environment will be better understood once decisions have been made by the Government and negotiations have concluded with EU member states.

This article was written by Sarah Beeraje, Senior Manager - KPMG in the UK and Abe Amoo, Assistant Manager - KPMG in the UK

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