The corporate tax landscape after Brexit
The corporate tax landscape after Brexit
What might the future hold for UK corporate tax following Brexit?
In the immediate aftermath of Brexit, the withdrawal of reliefs based on EU directives including the Parent-Subsidiary Directive and Interest and Royalties Directive may impact withholding taxes on interest, royalties and dividends paid by associated companies which are resident in EU member states. In the longer term there is scope for the Government to bring in more generous tax incentives and potentially make the UK a low tax economy to boost the UK’s attractiveness to investors however, given the coronavirus crisis which will no doubt have a lasting impact on public finances the political will for such an approach may be limited, at least for the time-being, as the Government looks to balance the books.
In the short term, from a corporate tax perspective, we will see the following changes:
Au revoir to EU directives
From 1 January 2021 the UK will cease to be treated as a EU member state for the purposes of other EU territories applying EU directives including: the Parent-Subsidiary Directive; the Interest and Royalty Directive; the Merger Directive; the Directive on Administrative Cooperation (DAC); the Anti-Tax Avoidance Directive (ATAD); and the Directive on tax dispute resolution mechanisms in the EU. The impact of this includes the following:
Interest, royalties and dividends
The tax treatment of interest, royalty and dividend payments from the EU to the UK will be dependent upon the domestic law of the source country and the relevant tax treaty between that country and the UK. Although the UK has an extensive treaty network, some treaties including those with Italy, Portugal and Germany offer a less favourable outcome than has been the case under the EU directives.
In the short term, companies with undistributed earnings in EU subsidiaries which may be subject to irrecoverable dividend withholding tax post transition, should consider payment of dividends before the transition period expires on 31 December 2020. The UK is likely to renegotiate some of its tax treaties, particularly those with less favourable terms.
Cross border mergers
From 1 January 2021, cross border mergers involving companies incorporated in the UK will no longer be possible. There should be no retrospective taxation of past transactions.
Where a company is subject to double taxation, it may be able to seek resolution through mutual agreement procedure (MAP). Within the European Union, taxpayers can request MAP assistance under the European Arbitration Convention. HMRC have confirmed that from the end of the transition period the UK will no longer be covered by the Convention, however any requests for assistance made by 31 December 2020 will continue to be worked on until they are concluded.
From 1 January 2021, MAP assistance will need to be sought through negotiated bilateral treaties where available however in some cases treaty MAP articles may only require the competent authorities to ‘endeavour’ to reach an agreement that eliminates double taxation whereas the Convention provides for mandatory binding arbitration. Fortunately, the OECD’s BEPS Action 14 on making dispute resolutions more effective and its multilateral instrument (MLI) have increased the number of UK treaties which provide for mandatory binding arbitration.
UK domestic law
Where the UK has passed domestic laws to implement directives, the Government will need to decide whether to retain them. As an example, the UK has passed legislation to implement the EU Directive on Administrative Cooperation (DAC 6) introducing new disclosure and reporting rules for intermediaries involved in certain types of cross border tax arrangements. It is expected that Brexit will not affect the UK’s domestic implementation of DAC 6.
Administrative points to note
European Economic Area (EEA) companies with UK establishments
The UK's exit from the EU will impact the information that Companies House requires in relation to EEA companies with UK Establishments (branches) registered. This is in order to align the Registrar's records for those of UK Establishments with non-EEA companies.
After 31 December 2020, any EEA companies with UK Establishments registered under the Overseas Companies Regulations will be required to provide additional information to the Registrar including the registered office or principal place of business address and the law under which the entity is incorporated. Companies will have three months from 31 December 2020 to submit the required information to Companies House.
EEA corporates which have their head office in the UK (based on freedom of establishment within EU)
From 1 January 2021, some European entities formed under EU law will no longer be able to be registered in the UK. These entities are:
- European public limited liability companies, known as ‘societas Europaea’ (SEs); and
- European economic interest groupings (EEIGs).
SEs and EEIGs that have not made alternative arrangements before 1 January 2021 will be automatically converted into new UK corporate structures. This means they will still have a clear legal status from 1 January 2021.
SEs and EEIGs registered in the UK can make alternative arrangements before 1 January 2021. For example, an SE can convert to a UK public limited company (PLC) if it has:
- Been registered for at least two years; and
- Had two sets of annual accounts approved.
SEs and EEIGs can also move their seat of registration from the UK to another EU member state but these arrangements must be completed before 1 January 2021.
What might the longer-term future hold?
Brexit is expected to give the UK greater flexibility and control over its tax regime, especially from a VAT and customs standpoint. From a corporation tax perspective, the UK will no longer be subject to existing EU State aid rules and therefore the Government may have increased flexibility to introduce more targeted tax incentives aimed at boosting the attractiveness of the UK as an investment location. It should be noted however that there will still be some form of subsidy control replacing the EU State aid rules which may restrict this to some degree.
The UK Government has confirmed that it ultimately wants to design its own subsidy control regime, which businesses should have an opportunity to comment on in 2021, however in the short term the UK will follow World Trade Organisation rules, and any commitments on subsidies agreed through the UK’s free trade agreements.
The Business Secretary, Alok Sharma, commented in September that “the UK must have flexibility as an independent, sovereign nation to intervene to protect jobs and to support new and emerging industries now and into the future.” The Government has also indicated that it wants UK-wide subsidy control so that competition between regions of the UK is not distorted. This suggests that any Government subsidies, including in the form of corporate tax measures, will be targeted at particular industries rather than geographic regions so it will be interesting to see how this ties in to the Government’s ‘levelling-up’ agenda to address economic disparities between regions of the UK, or indeed its much heralded Freeports policy.
There has been past media speculation that Brexit could result in the UK aggressively cutting corporation tax ultimately positioning itself as a ‘tax haven’ on the edge of Europe however there appears to be little political will for this, particularly in the context of the ongoing coronavirus crisis which scarcely anyone could have predicted at the time of the EU referendum back in 2016. It is more likely in the short term that corporation tax will need to rise, at least for a temporary period to help balance the books. The Government has so far shown little appetite for radical reform of corporation tax.
Bear in mind too that the UK remains part of the G20 and OECD, and much levelling of the tax playing field in recent years has come out of the BEPS project and its guidance on harmful tax practices. It’s not just EU membership that places limitations on fiscal sovereignty.
Any new tax incentives that are introduced will be expected to pay their way in terms of stimulating economic growth. Potential measures could include enhancements to, or a broadening of, research and development relief particularly for growth sectors such as technology, clean energy and logistics. Look out too for tax incentives and reliefs related to construction and infrastructure investment, including house building and civil engineering grands projects, potentially combined with reform of the planning system. Enterprise zones were one of the controversial but generally popular regeneration policies of the Conservative Government of the 1980s and it’s easy to see how these could have a form of rebirth under the umbrella of levelling up.
As well as offering carrots in the form of tax incentives, the Government may look to protect its existing tax base with the stick of a harsher regime of exit taxes on businesses transferring their tax residence out of the UK. Under current rules, when a company ceases to be tax resident in the UK and becomes resident in another country, a charge to corporation tax arises under various provisions of the tax legislation. Where the new country of residence is in the European Economic Area (EEA), however, it is currently possible for payment of an exit charge to be deferred.
In summary, it is likely that the long-term impact of Brexit on corporation tax will be in the form of measures to preserve and attract investment in the UK and stimulate domestic growth, perhaps including tax reliefs targeted at fast-growing sectors, intellectual property and innovation. Another possibility is reform and possible tightening of exit taxes. The initial economic shock of Brexit coupled with the ongoing impact of COVID-19, however, mean that in the short to medium term we are more likely to see tax rises as the Government grapples with balancing the books.
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