Theresa May invoked Article 50 on the 29 March 2017 and as a result, the UK is set to leave the EU on 29 March 2019. Since the referendum in June 2016, there have of course been what feels like hourly updates on what commentators believe leaving the EU in general terms will mean for the UK, the underlying theme of which has been ‘uncertainty’.
In the tax arena, much of the recent debate has been focused around indirect taxes and particularly the impact of the UK’s withdrawal from the Customs Union. We should also consider, however, what Brexit will mean for UK direct taxes, and the role of transfer pricing.
Firstly, most businesses with UK operations have been and will continue to try and model the tax impact that Brexit could have on their business, as Mrs May sets out her vision for Brexit and her major principles for negotiation. Depending upon the results, businesses may consider moving significant functions, assets and risks away from the UK. The financial sector has been particularly vocal about moving their headquarters away from the UK and this volume may increase, now that Mrs May has ruled out financial passporting. Equally, some multinationals may choose to invest more or even move significant part of their businesses to the UK, as they may feel they have suffered at the hands of the ECJ with its ‘onerous’ legislation and the ECJ will have no jurisdiction once the UK has left the EU, which provides opportunities.
What we do know is that significant profit generating units will either move out or into the UK, all of which will require significant input from a transfer pricing perspective. What we don’t know is whether there will be a significant reduction or appreciation in the tax take for the UK Exchequer? If it is the former, will the UK government consider a further reduction to the corporate tax rate, to try and retain and attract multinational’s functions to the UK? Will they funnel investment into HMRC’s transfer pricing division, to police more stringently the UK transfer pricing affairs of multinational companies?
It will also be interesting to see whether there will be any changes to UK-UK transfer pricing legislation. If we cast our minds back to 2004, the UK government’s hand was somewhat forced, to implement this legislation. The ECJ saw the lack of UK-UK transfer pricing as disadvantaging EU investors coming to the UK. We know that this legislation has been an additional burden to businesses and HMRC felt forced to extend the measures in 2013, to prevent businesses using the compensating adjustment simplification measures introduced, to reduce their UK tax bill. Once the ECJ has no jurisdiction over the UK, will this be reviewed or will changes be impossible because Mrs May has confirmed that the UK will continue to abide by EU state aid rules?
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