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Brexit and the Direct Tax implications

Matthew Hall

12 July 2016

The dust is starting to settle following what many consider to be the surprise outcome from the EU referendum on 23 June.  You will have already seen responses from my colleagues in relation to VAT, Personal Taxes and Employment Taxes, and I thought I would take a few minutes to consider the potential direct tax changes for businesses.

EU Directives

In my view, three main directives issued by the EU have a bearing upon UK direct taxes.  These are the Mergers Directive; Parent & Subsidiary Directive; and the Interest & Royalties Directive.

The Mergers Directive essentially works so as to ensure cross border mergers within the EU are offered the same tax breaks as wholly UK mergers.  This of course seems perfectly sensible in the context of the EU model and therefore the UK did legislate to comply with the directive.  I do not expect this legislation to be disturbed as it now forms part of the fabric of UK domestic legislation.

The Parent & Subsidiary Directive operates so as to prevent withholding taxes on dividends between EU companies where there is significant participation.  Upon leaving the EU this could mean that UK companies find withholding taxes being applied on dividends received.  Of course, we do still have tax treaties with each country which could limit this effect.

The Interest & Royalties Directive similarly prevents withholding taxes on payments between EU companies.  As with dividends we would therefore need to revert back to tax treaty rates with the individual countries.

State Aid

Whilst the loss of application of EU Directives could mean a potential tax increase for UK companies, there could be some better news from the UK no longer being bound by EU rules on State Aid limitation.  In particular, the UK government could potentially make the following tax reliefs more generous

  1. Research & Development Tax Credits (R&D);
  2. Enterprise Investment Scheme (EIS) relief;
  3. Enterprise Management Incentive (EMI) share options; and
  4. Venture Capital Trust (VCT) relief

UK Companies in International Structures

I have had many conversations over the past few weeks concerning the continued use of UK Companies within international group structures.  The UK remains a very tax effective holding company regime, and with the possibility of the main rate reducing to 15% this may become more attractive.  The obstacles with dividend, interest and royalty withholding taxes need to be overcome, but there is plenty of time before any Brexit…so watch this space!

In the meantime, if you would like to discuss the potential implications for your own business, please contact your usual Wilkins Kennedy partner.

About Matthew Hall

Matthew Hall

Matthew specialises in advising owner managers and their businesses, with particular emphasis on tax planning and structuring. He has considerable expertise in advising growing businesses on a range of issues including the development and drafting of Employee Share Schemes.

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