Brexit – Where Are We Now?

08 May 2017

Brexit will almost certainly have an impact on your business. Brexit is unprecedented – the UK is on track to be the first full Member state to leave the EU. However let’s not get too carried away, Algeria left the EU in 1962 (when it gained independence from France) and Greenland left in 1985 following a referendum there. Whereas the impact of a Member with the economic might of the UK leaving will indeed be significant, the world will still keep turning on 29 March 2019.

So, what is the calm view of the tax landscape post Brexit for Irish business? We can break it down into a number of categories. Given that the shape of the rules post Brexit is still highly uncertain, a precise prediction is not possible. There are some likely outcomes, however.

Indirect Taxes

  • Customs duty is currently governed by the EU single market and well established, homogenised rules. Brexit will probably bring this to an end and will result in more costs in Ireland and the UK. The costs will fall into three categories: actual taxes, cash flow costs and compliance requirements.
  • VAT is another EU homogenised system. Although VAT rates are not uniform across the EU, the application of VAT is governed by well worked out common rules. In addition, there are EU mechanisms (such as the reverse charge mechanism and the Mini One Stop Shop) which ensure that the operation of VAT is streamlined and that cash flow costs are often eliminated. Post Brexit the ultimate VAT cost on goods and services to the consumer may not change; however where Ireland and the UK interact, compliance costs will increase and cash flows on VAT could well become more expensive.

 Movement of People

  • Income tax rates should not be directly impacted by Brexit.
  • Social security – PRSI and NIC – are governed by EU common rules. However, there is a Social Security Treaty between Ireland and the UK that should limit the impact of Brexit on social security.

Direct Taxes

  • EU Directives provide a number of reliefs from withholding taxes where companies interact with each other cross border. These reliefs include better systems for withholding taxes on royalties and dividends, use of losses within groups and relieving CGT on group reorganisations. With the onset of Brexit, these Directives may not be available to relieve such transactions between Ireland and the UK. The impact of this will be mitigated, however, because Irish domestic rules in the main provide generous reliefs from withholding taxes when interacting with Treaty countries, and these should continue to apply to interactions with the UK.
  • There is a slight danger that clawbacks from previously claimed reliefs could be triggered post Brexit – it is to be hoped that in advance of Brexit actually happening that legislation will be put in place to avoid any such clawbacks.
  • If group reorganisations are being contemplated, there may be advantages in undertaking them before Brexit arises in order to avail of reliefs while the UK is still in the EU.
  • The Irish 12.5% corporation tax rate will not be directly impacted by Brexit. The indirect impact could be significant, however. Two things are likely as a result of Brexit. First, the UK will be at a competitive disadvantage by being outside the EU and to compensate they will be tempted to reduce their corporation tax rate – below the already scheduled 17% rate. Secondly, the UK has been one of Ireland’s greatest allies in defending the sovereignty of its 12.5% corporation tax rate at the EU level - post Brexit that ally will no longer be there at EU decision making table. Ireland’s competitiveness in the FDI market could be impacted accordingly.

All this is to be balanced by the fact that Ireland’s position as a premier gateway to the EU can only be improved by the exit of a major competitor, the UK. Plus, Ireland’s historical over-reliance on the UK for trading will be upended, forcing us into a healthy renewed focus on the remainder of our EU partners.

Summary

In summary, after Brexit some taxes will increase, cash flows will be more challenging and compliance costs will be higher. Reliefs which now exist on doing business with the UK will also be eradicated or reduced. So, in many ways, Brexit will not be a good thing. But businesses have always been agile, innovative and resilient and will continue to reinvent themselves in light of Brexit. They will adapt to the new set of circumstances that Brexit will bring. We will continue to succeed.


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