The UK tax systems are currently heavily influenced by EU law and policy. A tension exists between the EU’s objectives of creating a level playing field for member states and removing obstacles to cross border trade and the UK’s desire to retain control of its own tax systems to complement Government policy.

George Osborne’s pre-referendum threat of a post Brexit emergency budget, to make £30 billion of tax rises and spending cuts to address the economic impact of a leave vote, has failed to materialise. A more cautious approach has been adopted with the Chancellor now, apparently, waiting for the dust to settle on official economic forecasts before announcing any new tax measures, at the earliest in this year’s Autumn Statement.

HMRC took the step of recording a telephone message to taxpayers to reassure them that it was business as usual and that there would be no immediate changes to the UK tax system following the referendum. It is more important than ever at these times of economic uncertainty for taxpayers to ensure that they are making the most of the tax allowances, reliefs and exemptions available to them to maximise their wealth and minimise their tax burden.

The Chancellor announced, at the start of July, his plans to reduce the rate of corporation tax to less than 15% (currently 20%) as part of his package of measures to demonstrate that the UK is still very much “open for business” and to continue to attract business to the UK as a “super competitive economy”. If this comes to fruition, then the UK would have the lowest corporation tax rate of any major economy. It would also bring it closer to Ireland’s very favourable tax rate of 12.5%.

VAT
One of the major areas that will be affected by Brexit is VAT. VAT is truly a European tax and embodies the EU’s objective of maintaining a level playing field for businesses operating in the EU and removing any tax obstacles to cross-border activity.

While, from a domestic point of view, the UK VAT rules are contained in UK legislation and associated HMRC publications, the underlying principles of VAT (which apply across the EU) are derived from the EU VAT Directives. This has two consequences:

When interpreting the VAT rules, the UK courts must take into account the EU VAT legislation and also cases decided in the European Court of Justice.
 Businesses operating in the EU have the confidence that a common set of rules will apply to transactions undertaken within the EU.

So as VAT is an EU institution, when the UK leaves the EU would that mean an end to VAT in the UK? The answer is almost certainly ’not’. VAT currently raises around 21% of government revenue in the UK, so simple economics mean that VAT or some comparable form of sales tax is likely to remain as part of the UK tax landscape for the foreseeable future.

Whilst it is likely that VAT would remain in place, the UK could enjoy greater freedom in its ability to set its own VAT rules and rates – e.g. in relation to which goods and services might qualify for exemption or zero-rating. This is already the case for property. What is less clear is how the UK VAT rules would interact with the EU VAT regime.

At present, transactions undertaken within the EU are treated differently from those undertaken with non-EU countries, and so for UK businesses trading with the EU there would be a degree of uncertainty as to how the post-Brexit rules would operate, especially as the two sets of VAT rules may differ over time. It would inevitably lead to greater reporting requirements and costs (e.g. a UK exporter may have to register for VAT with each country with which it trades).

State Aid
At present, the EU rules which seek to prevent state aid can impact on the UK tax system in a number of ways. For instance, at present, if the UK wishes to make changes to the tax incentives offered under the various venture capital schemes or renewable energy incentives, care must be taken to ensure compliance with the State Aid rules and therefore the tax reliefs and sweeteners must be precisely targeted and cannot be overly generous.

The UK’s ability to offer tax incentives to particular businesses, with a view to attracting them to the UK, is restricted. Such restrictions may no longer apply post-Brexit. On the other hand, the UK would no longer have any recourse to the EU if, for example, another member state introduced some form of State Aid that was not in the UK’s best interests.