Brexit: Four taxing issues

With the UK Parliament’s vote on its deal to leave the European Union put off to January, firms still lack clarity on whether the UK will be applying upcoming tax rules. Ceinwen Rees, a partner at Macfarlanes, details the key tax issues firms need to keep in mind.

Will Brexit disrupt BEPS?

Before answering this question, it may first be useful to first address what BEPS is.

The OECD’s base erosion and profit shifting (BEPS) project aims to prevent tax avoidance caused by multinationals exploiting differences in the tax rates and rules between countries. In doing so, the project aims to fundamentally change the tax landscape by implementing 15 action plans. To achieve this goal, some 100 countries, including the UK, are collaborating in implementing some, or all, of the BEPS action plans.

Returning to the original question; the BEPS project is a global initiative the EU has embraced rather than an EU-specific project. Therefore, the UK’s involvement with anti-BEPS activity should not be materially impacted by Brexit.

The UK has already implemented the particularly painful BEPS action points and did so well before it needed to. In line with being a global leader in the fight against tax avoidance, the UK has even gone beyond what was required by the BEPS action plans in many cases, which has caused some surprising results on application. The conclusion being that Brexit is unlikely to disrupt BEPS (although see 3 below).

What is BEPS 2.0?

This is brand new to the market, so much so that it doesn’t really exist yet. The G20 leaders issued a communique after their meeting in December 2018 in which they reaffirmed their commitments to the BEPS project. In a tweet following the meetings, the director of the OECD Centre for Tax Policy and Administration, Pascal Saint-Amans, reported that “President Macron mentions need for BEPS2.0. Exciting times!” This is taken to mean that a globally agreed minimum rate of corporation tax has been advocated.

BEPS 2.0 has echoes of the EU’s proposed Common Consolidated Corporate Tax Base (the CCTB), which proposes a single set of rules to establish corporate taxable profits across the EU. Brexit should mean that the UK is outside the CCTB but, given the UK’s involvement in the G20 it may not enable us to clear BEPS 2.0.

What about the UK becoming a tax haven?

The tax haven route has only really been spoken about in the same breath as a no-deal Brexit. In 2017 the UK chancellor, Philip Hammond, said that as part of his no-deal Brexit preparation he would be maintaining “enough fiscal firepower to support our economy if that happens”, which has been widely interpreted as meaning that the UK could turn into a tax haven. Further hints towards this line of thinking were made by Hammond following the Budget last month when he said that in the event of a no-deal Brexit there would need to be an emergency Budget to set a “different strategy for the future”.

This type of strategy doesn’t fit comfortably with the UK’s current approach to the implementation of BEPS, so it is possible that the UK will use Brexit as the catalyst to change its BEPS approach. However, given the UK’s need for global relations post-Brexit, annoying the G20 by rejecting BEPS may be an unattractive option. Together with the enthusiasm with which the UK has adopted the BEPS action plans, it is unlikely that reining in BEPS implementation will be top of the UK government’s post-Brexit agenda. It feels more likely that the UK will change its tax rates and implement new tax reliefs, thereby taking some of the sting out of existing BEPS legislation.

If, on the other hand, a deal is struck, it seems unlikely the UK will be signing up to receive its tax haven badge and “Singapore on Thames” will become a distant threat.

The political declaration published on 25 November 2018 contains commitments that require both the EU and the UK to ensure a “level playing field” on tax. Broadly, this means that companies operating in different countries operate in a similar environment, which gives the UK less scope for dramatic change. There have also been various statements made regarding their resolve to continue to be front and centre of international tax developments (by which we read BEPS).

What does Brexit mean for the current tax system?

If the Withdrawal Agreement Bill gets through UK parliament (by no means a certainty), the UK’s membership of the EU effectively remains in place until the end of the transition period. This should mean that there are no immediate changes during 2019.

By Ceinwen Rees, Partner at Macfarlanes LLP. For more detail on possible tax pitfalls that may result from Brexit, Macfarlanes have published a no-deal checklist which can be viewed here: