Securing the UK’s terms of withdrawal from the European Union and how the new cabinet will go about this is already under scrutiny from the Treasury select committee.
According to Andrew Tyrie MP, chairman of the Treasury select committee (TSC), the UK’s future financial relationship with the European Union (EU) needs to be considered carefully.
There will have to be significant work done on measures such as passporting of goods and services, including financial services, taxation harmonisation, measures already being put into place such as the Markets in Financial Services Instruments Directive II, and other rules, he said during one hearing on 29 June.
Taxation in particular will be a big issue for the new government to tackle in the coming weeks and months, with many tax measures debated in government consultations over the past year having been put on hold in the lead-up to the EU referendum.
Already corporation tax was mooted by the previous chancellor to become less than 15 per cent in a bid to soothe businesses in the immediate aftermath of the vote to leave.
However, other tax measures set to come into force in the next year include taxes on people living in the UK, pensions tax relief and access to the UK state pension, among others.
George Bull, senior tax partner for RSM UK, says: “The reshaping of our relationships with the EU will determine the future direction of the UK tax system.”
He warns: “The referendum has already held up approximately 40 pieces of tax legislation which will now be reactivated. Most of these will come into force between late 2016 and April 2017.
“The changes we might see in the UK tax system revolve around the formal date of exit from the EU.”
According to Mr Bull, the UK has had many disagreements with the EU in the past over the scope and operation of UK taxes, including:
- Patent box
- Changes to the taxation of foreign controlled companies
- Differential rates of insurance premium tax
- Capital duty
Post-Brexit, he expects a number of changes to direct taxation, such as potentially abolishing transfer pricing for UK to UK companies, or the UK government being able to ignore EU State Aid Rules and give selective tax advantages to companies via advance tax rulings.
Mr Bull thinks while VAT would continue to operate in the UK in much the same way as it always has, he believes there could be issues with output VAT.
He says: “This could harm UK exporters unless a mechanism is developed to allow EU importers to reclaim import tax in much the same way as they do now.”
Expatriates
Rachael Griffin, financial planning specialist for Old Mutual Wealth, believes there may be some problems implementing changes announced in 2015 to amend the way long-term UK resident non-domiciles are taxed.
Non-dom status means individuals can benefit from the remittance basis of taxation, so they can live in the UK without paying UK tax on assets and earnings held overseas, unless remitted here.
However these rules were, according to Ms Griffin, a “big focus” of the 2015 election and in his Autumn Statement, the then chancellor George Osborne pledged to reform non-dom rules.
“In the current climate, however”, says Ms Griffin, “it is possible these reforms will be delayed. The new prime minister [Theresa May] could decide it is not the time to be introducing complicated measures that risk discouraging people from residing in the UK.”
Pensions taxation
There may also be an issue with pensions taxation, as Adrian Walker, retirement planning expert at Old Mutual Wealth, comments: “Now a leave vote has been cast, there is a big question mark over the future of pensions tax relief.
“The former chancellor pushed through massive changes to the pensions system already, and it seemed the Treasury was keen to explore reform of tax relief. Now, it remains to be seen whether the new chancellor [Philip Hammond] feels able to press ahead with further pensions reforms.”
He also comments any radical shift, such as moving to a pension Isa system, seems less likely, although introducing a flat rate would be “revenue generative” for the Treasury.
Yet many commentators have concerns about the triple lock, from which British expats can benefit currently if they live in the EU or in countries within the European Economic Agreement area. This deal will have to be renegotiated as part of the UK’s withdrawal from the EU.
Moreover, future tinkering with investment or pensions taxation might push more clients towards considering alternative investments within their portfolios, especially ones which have attractive tax incentives.
Charles Owen, founder of CoInvestor, says: “Financial advisers need to recognise their clients may want to ‘take back control’ of their own assets in order to protect against market volatility and preserve their wealth.
“Alternatives may represent up to 10 per cent to 15 per cent of an investor’s total portfolio, and can offer significant tax benefits thanks to enterprise investment scheme offerings and other tax-efficient investments, including ones which benefit from social investment tax relief, business property relief, inheritance tax relief, as well as venture capital trusts.”
