The UK government would be likely to have an "emergency" budget shortly after next month's EU referendum if there is a "leave" vote. It would use that budget to give clarity on its priorities for changes to the tax regime.
Its proposed changes to the corporate tax regime would be influenced by the eventual trading relationship negotiated with EU countries and other trading partner nations.
The government would have complete sovereignty over the tax system, reversing years of challenges to the UK tax system based on EU law principles. It could make sweeping changes to the corporate tax system, provided existing bilateral double tax treaties are respected, including offering additional incentives without having to seek EU state aid clearance.
It would also be able to simplify some regimes for UK companies by exempting transactions entirely between UK companies from the scope of transfer pricing and similar rules. The Treasury might also be tempted to introduce a law abolishing historic EU-law based tax refund claims, saving the exchequer many billions of pounds.
However, it would still be bound by its commitments, as a member of the G20 group of rich nations and the Organisation for Economic Co-operation and Development (OECD) in respect of the OECD’s base erosion and profit shifting (BEPS) recommendations to prevent tax avoidance by multinationals. The UK government has been keen to be an ‘early adopter’ of BEPS recommendations, with restrictions on interest deductibility due to come into force in 2017. Leaving the EU is unlikely to soften the current government's approach to clamping down on tax avoidance by multinationals.
The EU’s free movement principles protect UK businesses from unfavourable treatment when investing and operating in the EU and European Economic Area (EEA). In particular, current EU directives on interest, royalties and dividends help to make the UK an attractive location for EU holding companies by eliminating withholding taxes in most situations.
If the UK did not join the EEA on leaving the EU it would have to rely on bilateral double tax treaties, which are less generous in some situations.
This may have a negative impact, particularly for companies based in non-EU countries such as the US which might currently consider the UK as a holding company jurisdiction to invest into Europe.
Equally, UK companies which currently use the tried and tested Luxembourg holding company route for European investments might find additional tax payable on repatriation of profits to the UK, leading to a need to incur restructuring costs.
In relation to indirect taxes, if it left the EU the UK would be likely to keep the system of VAT, given the large fiscal contribution it makes to the Treasury. Whilst the tax would be exclusively governed just by UK law, the UK is unlikely to want to depart heavily from the EU rules and jurisprudence since doing that would mean that businesses would have to comply with the UK's system and the EU's.
However, leaving the EU would enable the UK to extend the scope of zero rating and exemptions. It would also not be forced to follow decisions of the Court of Justice of the European Union (CJEU), such as in relation to the operation of the VAT group rules, where HMRC and taxpayers alike are happy with the current treatment.
For those already challenging the UK's VAT laws in the CJEU the position is not clear. The CJEU should continue to have jurisdiction whilst the UK negotiates its withdrawal but whether that will be the case after an exit, in relation to periods whilst the UK was within the EU, is not clear.
In some areas, such as financial services and insurance, the VAT treatment of a transaction depends upon whether the services are supplied to someone inside or outside the EU. This can have an impact on VAT recovery and in some cases whether or not VAT is charged. The UK would have to consider how to apply VAT in these situations.
In terms of trade agreements and customs tariffs the UK would retain any bilateral agreements to which the UK is itself signatory but would eventually lose the benefit of the agreements for which the EU is the signatory.
If the UK left the EU and did not join the EEA or the European Free Trade Agreement, it would need to establish customs tariffs which would apply to trade with the EU, as well as any other countries where the UK currently benefits from EU-level agreement rather than as a direct signatory.
Whilst being a WTO member provides some baseline protection on tariffs, whether the UK is able to secure the same or improved terms to those currently available to it as an EU member would depend on the strength of its bargaining position as it moves outside the world's largest trading bloc. The calculation for Brexiteers is that, as the bloc itself would be diminished, third countries would be likely to offer equivalent terms to the UK standing on its own.
Jason Collins is a tax expert at Pinsent Masons, the law firm behind Out-Law.com.
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