On June 23, 2016, the U.K. voted to leave the European Union (E.U.) by a 52%-to-48% margin.
A year-and-a-half later, though, the air is starting to clear in the U.S. as 2018 beckons, as favorable new tax policies for foreign companies doing business in the U.K. become reality.
That doesn't mean corporate financial officers should relax. As Brexit negotiations ramp up between the U.K. and the European Union ahead of a mid-2019 deadline, the heat is on for companies doing business in the U.K. to get a firm grip on the resulting corporate tax environment in a post-Brexit England.
While the prospect of unraveling the U.K. from the E.U. may take until 2019, there are several key tax and corporate finance-related takeaways corporate financial professionals can weigh right now as Brexit is negotiated, and thus position their firms more favorably for the U.K. economy in the years to come.
What are the “big issues" in play for businesses affected by foreign exchange? Here's a look at the situation, and the tax and finance-related impact of doing business in a post-Brexit U.K.
Challenges in risk management
Overall, companies doing business in Britain and in the Eurozone should create an action plan for assessing and addressing enterprise risk changes coming in the aftermath of Brexit. Clear communications and concise allocation of finance, tax, and investment risk management responsibilities should be the watchwords going forward. In particular, companies conducting cross-border trading in the U.K. and in the Eurozone should expect material changes in trade policies in both regions, while carefully negotiating what is expected to be a transformed foreign currency landscape—one which will affect cash outlays and revenues in a post-Brexit world.
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Corporate accounting and tax issues
Forward-thinking accounting and tax professionals, especially corporate treasurers, should waste no time in getting their European Markets Infrastructure Regulation (EMIR) in full compliance. U.S. companies doing business in Europe should also quickly craft a plan to evaluate myriad financial reporting considerations linked with potential foreign exchange volatility. In particular, corporate financial managers would do well to fully assess company hedging strategies, treasury management, and collection of receivables, among other key financial areas.
New position on BEPS?
With its exit from the European Union, the U.K. is free to establish its own value-added tax rates, a process that has already begun. On a larger scale, the U.K. could create its own position and policy on the Organization for Economic Co-operation and Development's Base Erosion/Profit-Shifting (BEPS) project, without embracing any E.U. mandates on the international taxation initiative. Much like the U.S., however, Great Britain would remain accountable for BEPS on an international stage, and would need to establish positions that meet that need, even though the U.K. is now free of any direct E.U. directives on BEPS.
New tax initiatives already approved
The U.K. government has been vocal about implementing more favorable tax policies toward companies aiming doing business in a post-Brexit economy. Those initiatives are already in play and some already became law in 2017.
Overall, the U.K. government is aiming for tax reform in these key areas:
- A lower corporate tax rate
- A revamping of the corporate tax base, primarily via BEPS (see above)
- New policies and directives on tax evasion
- New policies and directives on the increased use of digital tax systems
Already this year, the U.K. passed into law a reduction in the corporate tax rate to 19%—effective April 1, 2017—as well as a new “apprenticeship levy" of 0.5% of all corporate payroll costs in excess of three million pounds annually. The U.K. also approved an extension of current corporation tax rules impacting non-U.K. companies that either invest in or develop U.K. real estate property, a rule that went into effect in July, 2016.
In addition, a new reduced corporate tax rate for companies based in Northern Ireland has been approved by the British Government and is awaiting approval from the Northern Ireland government, along with final approval from the U.K. Treasury.
Potential future taxes that impact businesses in the U.K.
Going forward, the U.K. government is currently drafting and deliberating additional tax reform measures, including a further reduction of the corporate tax rate to 17% by April, 2020. Additionally, newly-formed loss utilization mandates are being negotiated that would allow companies to be more flexible in the use of losses carried forward—albeit with limits on the use of carried forward losses to 50% of relevant company profits, but limited to profits over GBP five million. The U.K. also targets a 2020 date to shift tax reporting, compliance, and payments onto a digital platform.
A New Phase for the U.K., and For Companies Operating in Britain
For FX corporate finance professionals, estimating the financial and tax impact of the ongoing “Brexit" exit and the intricacies of doing business in the U.K. has been a complicated affair.
But with movement afoot on Brexit, new corporate-related tax measures aimed at attracting more companies, and more investment into a post-Brexit U.K., the footing becomes more solid for companies doing business in the U.K. as 2018 opens for business.
Key Brexit-Related Dates
June 23, 2016: The U.K. votes to depart the European Union.
March 29, 2017: Article 50 is triggered, officially notifying the European Council of Britain's intention to leave the E.U.
September 30, 2018: By this date, Michel Barnier, the E.U.'s chief Brexit negotiator, mandates the terms of Britain's departure from the E.U.
March 31, 2019: By this date, the U.K. government, led by Prime Minister Theresa May, aims to finalize Brexit negotiations.
May 2019 (Scheduled, but not official): On this date, The U.K. would officially leave the E.U., after the ratification of Brexit by all other European Union member states.