Ronnie Brown: 'There is never a dull day in the life of a Scots tax lawyer'

There is never a dull day in the life of a Scots tax lawyer. While the ever decreasing time between Autumn Statements and Spring Budgets may be age-related, the additional layer of Scottish tax legislation to absorb, be it the Scottish Rate of Income Tax or the LBTT Additional Dwelling Supplement, undoubtedly plays it part.

However, the issue currently vexing many clients, and filling my inbox as a result, is the impact from a tax perspective on their businesses of Brexit. Even those with no operations in the EU are concerned about the effect it may have on the stock or materials they import from it.

VAT is rightly viewed as having its genesis in the EU. However, having lived with it for over 40 years and given it accounts for around one-fifth of the UK’s tax revenue, it is unthinkable that it would be scrapped following Brexit. It is more likely that it will be rebranded, if only to prove a point, but, in the early years at least, remain largely the same in its effect. There may be changes around the fringes of reliefs and zero-rating but the risks of double taxation and double non-taxation will act as a check to those advocating wholesale revisals.

Nevertheless, a decoupling will come at a cost to business as they adapt to the cashflow impact of paying VAT on imports to and from the EU where previously either there was none or it arose later in the process. Likewise, the benefit of movement of goods free of customs duties within the EU would likely be lost or significantly modified unless the UK, like Norway, joined the European Free Trade Association. All of these will are likely to lead to an increased administrative burden too with the attendant cost that brings.

The jurisprudence of the new tax would also diverge from that of VAT, as rulings from the CJEU would no longer be binding upon the UK, unless Brexit resulted in us joining the EEA. This freedom over fiscal sovereignty may be welcome in some areas but the loss of the ability to refer to the ultimate arbiter of fiscal neutrality, equality and proportionality may make it a double-edged sword.

While direct taxes are less likely to be affected, there will still be potential issues to resolve for those clients who have businesses based in the EU. As we would no longer be subject to the Parent-Subsidiary Directive or the Interest and Royalty Directive, the UK would need to rely upon bilateral tax treaties with individual EU countries if it wished to preserve the benefit of no withholding taxes on dividends, interest or royalties paid to a UK parent by its EU based subsidiaries.

In contrast to VAT, harmonisation of direct corporate taxes in the EU is still a distant prospect.The CJEU has sought to modify individual countries’ tax laws where these were considered to be contrary to EU principles against state aid, discrimination and restriction of fundamental freedoms. The litigations concerning the UK rules on franked investment income and on group relief as they apply to EU subsidiaries are two recent examples. If Brexit was negotiated on terms that did not entail joining the EEA, the UK would be free to revert to its original or a revised stance on such matters but would, in the process, lose the protection against EU countries adopting similar positions in relation to it.

The underlying concern would be that, in creating a divide between itself and the EU countries, the UK runs the risk of losing its highly valuable status as the gateway to Europe for many non-European, particularly US, businesses.

Of course, all of this is, at this stage, largely conjecture. Whether Brexit will happen is still to be determined and, if it is, the form it will take will need to be negotiated. The latter may take years to finalise. Add to this the possibility of the SNP demanding a new Independence Referendum on the basis it will seek Scotland’s readmission to the EU – is it just me or has that clock got faster?

Ronnie Brown is a partner at Burness Paull LLP