As a result of the voters in the United Kingdom deciding to leave the European Union, a variety of tax questions are arising that should be considered across all financial lines.
But what do they mean for you — whether you’re operating a global company with a presence in the country, employing expatriate workers or even investing in a British firm?
From a corporate perspective, financial statements will be impacted as a result of the significant change in the exchange rate between the British pound and other global currencies. You may see a negative impact to your consolidated financial statements, along with added pressure for disclosures, depending on how substantial your operations are in the country. And no one knows how markets will react to the updated earnings statements of international companies with broad exposure there.
You’ll also have to prepare your staff for the new reality. Approximately 1.3 million people from Britain are living and working in other EU countries today. Under Article 50 of the European Union’s Lisbon Treaty, Britain has two years to arrange the terms of its exit, which will include deals related to how these people will be taxed. This impacts not only the current working population, but also pensioners. About 3 million people from other EU countries working and living in the U.K. will also be affected.
Companies should prepare these workers for the uncertain effects of short-term fluctuations in exchange rates and longer-term tax policies that have yet to be developed.
Also in the short-term, companies with employees in the U.K. and the EU may need to more frequently review their employees’ compensation, including cost of living allowances and other home- or host-based salary and allowances.
On the corporate side, the U.K. corporate income tax rate is one of the lowest of all industrialized countries, currently sitting at 20 percent. Businesses have looked to the U.K. as a safe haven to accumulate profits at a much lower rate than other countries around the globe, including elsewhere in the EU. The tax rate was much higher 10 years ago and has been on a planned decline over some time. The question is whether the U.K. will be able to retain this low rate in the face of the financial pressures resulting from Brexit and the resulting impacts to the economy. Several economists have already predicted that this won’t be sustainable.
Under the current EU directives, there are many benefits for a company to organize in one country and be able to easily do business throughout the EU. Though the UK is still part of the G20/G7, we do expect companies to have many more challenges around employment, income and value-added taxes after it leaves the EU.
After the two-year window mentioned above, it may not be so easy for companies to send employees, goods and services across borders. From a VAT perspective, there are at least three areas which will need to be addressed over the next two years:
Changes in VAT and cross-border duties
Compliance with EU countries versus non-EU countries
Systems to track and report these items
Each of these items will take time and money to address.
With the Brexit vote behind us, there is much uncertainty which we expect to see play out in the public debt and equity markets, as well as in the public and private M&A markets.
We are beginning to work with our clients regarding each of these matters. Our staff of professionals speaks 29 languages and is assisting companies locally and globally in planning for their next phase of growth in the European market.
As a member of Morison KSi, we also have partners in the United Kingdom providing the most up-to-date information on this fluid topic.
For more information, send an email to email@example.com, or read more from our London-based partner firm Kingston Smith here: EU: The UK has voted to leave but what does this mean for Small Medium Enterprises?