How to: Understand the Impact of Brexit on Your Taxes
The UK has been in the EU for so many years that most people are unaware of the degree to which law, finances, and society have been changed by the never-ending flow of legislation from Brussels.
For instance, VAT is an EU invention. In order to be a member state of the EU, a country must not only introduce VAT but also apply its rules uniformly in accordance with strict EU guidelines. Furthermore, VAT receipts collected by the UK cannot just be kept or spent — they must be remitted to Brussels in accordance with a strict formula. So, if the UK leaves the EU, it would potentially have complete control over the VAT system and could either keep VAT (and potentially keep all the receipts) or change it as it sees fit. Potentially, VAT could be abolished and replaced with a homegrown goods and services tax. Whether this will be more generous to taxpayers than the current system will probably depend upon the state of the UK’s finances after Brexit.
Apart from VAT, EU member states theoretically have sovereignty over their own tax systems. Having said that, quite a lot of the UK’s corporate tax system is heavily regulated by EU laws, including, for instance, the rate at which corporation tax is charged and the extent to which reliefs and incentives can be given to local businesses. This influence extends into the realm of personal taxation — not so much the rates of tax charged but the manner in which the tax system is administered. Much of the UK’s pension law, for example, is heavily influenced by Brussels.
If the UK leaves the EU, then, there is no doubt that, unless the UK stays in some kind of common market with the EU post-Brexit, Her Majesty’s Revenue and Customs (HMRC) will have far greater freedom to change the way in which individuals and businesses in the UK are taxed. This could be both good and bad.
For instance, the EU has strict rules on what it calls fundamental freedoms. Most of us know about the “free movement of people” as this crops up frequently in heated debates about immigration. However, more relevant to taxation is the “free movement of capital” and the “freedom of establishment”. These freedoms have forced HMRC to relax certain parts of the UK’s tax system that were seen as discriminatory against foreigners. This has been particularly relevant for British people with foreign spouses (or vice versa) or people with properties or businesses abroad.
The UK’s law of succession has also been heavily influenced by the EU, most recently by way of the introduction of the EU Succession Regulation. Previously, citizens of an EU member state were subject, on death, to the succession law of their home country but not in respect of property held abroad. For example, British citizens with holiday homes in France would often be flabbergasted to learn that they could not leave their property to whom they wished upon their death. The French state would instead determine who the beneficiaries would be in accordance with their strict forced heirship rules. Under succession regulation, British persons can now elect for UK law to be applied, even over the French property.
EU law has been woven into the fabric of our lives in the UK over the past 40 years, and the UK’s removal from this framework will have far-reaching effects for individuals, their families, and businesses. Whether this change will be positive or negative for families and finances is unknown at this stage. What we do know is that there will be a change — whether we like it or not.