Brexit and Your Taxes
June 28, 2016
By Mitchell Kopelman, partner-in-charge, Tax practice, Technology and Biosciences group
As a result of the voters in the UK deciding to leave the European Union (EU), there are many financial and tax matters which should be considered. These matters cross all financial lines. Below, we have summarized some of the questions you should be considering related to financial reporting and tax.
Financial reporting for global companies who have a presence in the UK
How will a company’s financial statements be impacted as result of the significant change in the exchange rate between the British pound and other currencies around the world?
Does your company have material financial operations in the UK? If so, you may see a negative impact to your consolidated financial statements. How will markets react to updated earnings estimates for global companies?
Does your company’s financial statement consolidate operations from the UK or into the UK? Or are you an investor in a global company with material operations in the UK?
There could be a variety of downward asset amounts recorded in financial statements and concerns about required disclosures depending on the materiality of companies’ operations in the UK.
Tax considerations for companies and individuals
There are approximately 1.3 million people from Britain working in other EU countries today. Under Article 50 of the Treaty on European Union, Britain has two years to arrange new deals related to how these people will be taxed. This impacts not only those working, but also pensioners in those countries. There are also approximately 3 million people from other EU countries working and living in the UK that will be affected.
These people will be impacted in the short-term by fluctuations in the exchange rates and longer-term by the tax policies which will need to be developed. Also in the short-term, companies with employees in the UK and the EU may need to more frequently review their employees’ compensation, including cost of living allowances and other home- or host-based salary and allowances.
Finally, this will impact impats and expats, whether they are working or retired, and inheritances all across the EU.
The UK company income tax rate is one of the lowest of all industrialized countries inside and outside of the EU, currently sitting at 20 percent. Businesses have looked to the UK as a safe haven to accumulate profits at a much lower rate than other countries around the globe, including the EU. The rate was much greater 10 years ago and has been on a planned decline over some time. The question is whether the UK will be able to retain this low rate or, as a result of Brexit and/or other financial challenges, if they will have to raise it.
Several economists in the EU are already predicting that the UK will have to raise their rate from 20 percent to a much higher rate, clearly something we will be keeping an eye on for our clients.
Under the current EU objectives, there are many benefits for a company to organize in one country and be able to easily do business throughout the EU. Though the UK is part of the G20/G7, we do expect companies to have many more challenges around employment, income and value-added taxes.
After the two-year window mentioned above, it may not be so easy for companies to send employees, goods and services cross-border. From a VAT perspective, there are at least three areas which will need to be addressed over the next two years:
Changes in VAT and cross-border duties
- Compliance with EU countries versus non-EU countries
- Systems to track and report these items
- Each of these items will take time and money to address.
Overall with the Brexit vote behind us, there is much uncertainty which we expect to see play out in the public debt and equity markets, including a lot of uncertainty in the public and private M&A markets.
We are beginning to work with our clients regarding each of these matters and will be glad to assist you in planning around this uncertainty.
Please reach out to us, and we will put you in touch with the right professional at our office. Our professionals speak over 25 languages, so we can help you wherever you are located around the world.
As a member of Morison KSi, we have included below an email our UK partner firm, Kingston Smith, published. If you would like to speak with someone at Kingston Smith, please let your Aprio contact know, and we will put you in touch with the right professional.
Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.
From our partner firm in the UK, Kingston Smith:
EU: the UK has voted to leave but what does this mean for Small Medium Enterprises?
You will have seen this morning that despite our poll reflecting a majority of 52.75% remain, the country has decided to leave the EU at a result of 51.9% leave, 48.1% remain. Furthermore, we have seen the announcement of David Cameron’s resignation, who will stand down as Prime Minister at the Conservative Party Conference in October. The immediate thought of many SMEs and owner-managed businesses will be on the impact of this historical outcome.
Our Managing Partner, Maureen Penfold says that the speculation is now over. Hard-hitting concerns over immigration, human rights, democracy and sovereignty have been at the forefront, rather than economic and trade issues which has led to the UK voting to leave the EU. It is natural to feel some concern over the uncertainty that will ensure – both domestically and with regards to our place on the world stage.
While entrepreneurs and owner-managed businesses take time to assess the implications, we know that UK SMEs are resilient and seize opportunity in the face of change. Business will continue as usual, because in reality, Brexit will not happen overnight. The bureaucratic upheaval involved and the procedural changes that come from withdrawing from the EU will be a gradual process as changes to legislation and regulation continue to unfold slowly in the coming months and years. SMEs should keep their eye on the ball as adaptability and stability are key right now.
There are a number of potential tax positives to Brexit for SMEs comments Tim Stovold, our Head of Tax. The EU has limited how generous the UK can make a number of its tax relief schemes such as Research and Development and Patent Box tax relief, which fall under the EU State Aid rules. Becoming free of these rules enables the UK government to increase the attractiveness of these schemes to support local businesses and encourage overseas investment in the UK.
Additionally, simplification of the Enterprise Investment Scheme and Seed Enterprise Investment Scheme would be a huge benefit too. Both schemes have become increasingly more complicated for SMEs to use as a way of raising equity investments, in order to comply with EU rules. The departure from the EU gives the UK government the opportunity to re-design these schemes, and implement a system that is simple to operate and beneficial to those using them.
Adrian Houstoun, our VAT Partner, says that many UK businesses are likely to face greater VAT compliance from the loss of intra community reliefs. At present the standard rate of UK VAT has to be a minimum of 15% and with up to two lower rates with a minimum of 5%. After leaving the EU the UK will be free to set rates as it chooses. In 2014/2015 VAT contributed nearly a quarter of the UK’s tax revenue so it is unlikely that there will be major changes to it, although the UK government would be free to abolish VAT and introduce a goods and services tax instead. Other potential areas that may be affected by VAT changes include legislation and VAT recovery.
Tessa Park, our Technical Partner, comments that from a financial reporting perspective, the impact of leaving the EU is not likely to be felt immediately. New auditing, ethical standards and financial reporting changes brought in as a result of the EU Audit Regulation and Directive could possibly be reversed. However, I would be extremely surprised if anything were to change in the short to medium term, not least because there might be a perception that the UK had less stringent standards than the rest of Europe.
Major change brings opportunity as well as risk, be it from a strategic or a technical perspective. The professional services industry may be impacted from a recruitment perspective, given the intense demand for talent in London. For the sports enthusiasts who are wondering about the impact of Brexit on football and rugby clubs – they will need to consider the employment status of their European players and consider reducing the length of contracts offered to new players in the future if employment restrictions are enforced.
As always, we are here to work closely with you on evaluating any potential impact that you face or any concerns you have and would be pleased to assist you in planning for your future. The UK is still a great place to do business and this will not change in the long term.
About the Author
Mitchell is the partner-in-charge of Aprio’s Tax practice as well as the Technology & Biosciences group. He has been a partner since 1990 with Aprio, which is the largest Georgia-based tax, accounting and consulting firm. Mitchell works with companies in the software, gaming, clean tech, financial technology (FinTech), health care IT, processing, biosciences (biotech and medical device) and manufacturing industries. Whether a company is pre-revenue, starting up, growing or preparing for a liquidity event, Mitchell works with them to maximize their potential at each stage. He is known for promoting research, innovation and entrepreneurship by enabling companies to be successful, regardless of where they are in their business lifecycle.