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The Brexit vote and Donald Trump’s impending arrival at the White House are useful reminders to ‘always expect the unexpected’. Clichés aside, no-one can predict the future and now it’s even more difficult for business owners to anticipate what’s on the horizon. We are ‘heading into uncharted waters’ as the newspapers keep reminding us. Who knows what Brexit will ultimately mean for UK businesses and the same applies to future economic relations with the US. Donald Trump has promised huge tax cuts, which some economists have argued are unsustainable. But will his policy priorities and fewer EU imposed restrictions post Brexit give rise to more business tax relief opportunities in the UK too? Brexit certainly offers scope for tax reform and this blog highlights what could potentially arise for SMEs.
Possible VAT reforms
VAT rates in the UK have been influenced by the EU since 1977, but following Brexit, the UK would sit outside the territorial scope of EU VAT. The government would therefore be free to review how VAT is charged in the UK or potentially replace it with a different tax.
It is likely that one of the most immediate consequences of Brexit will be the introduction of “import” VAT when goods enter the EU from the UK or vice versa when EU goods enter the UK. Although ultimately the import VAT cost would probably be recoverable there will be cashflow implications for many businesses.
Wider access to EIS and VCT reliefs
Enterprise investment scheme (EIS) and other venture capital (VCT) reliefs have been restricted in the past as a result of EU regulations. For example, the age of a company eligible for EIS investment has been reduced to seven years (or ten years in the case of a knowledge-intensive company) and the maximum amount that can be raised over a 12-month period is £5m. These restrictions were imposed as a result of EU state aid legislation, but they could be lifted by the UK government to widen access to investment capital, once the UK leaves the EU.
Expanded EMI share schemes to boost talent pool
In addition to EIS and VCT, other business tax relief schemes aimed at companies, such as EMI (enterprise management incentive) share schemes, could also be expanded and extended. Given that one of the highlighted drawbacks to Brexit is a potential reduction in the UK’s available talent pool, increased opportunities to improve staff loyalty by offering share ownership incentives could be beneficial.
Revoke new Nexus restrictions to patent box relief
The existing patent box relief scheme came under attack by the OECD recently, amid claims that it offered unfair advantages to UK companies compared with their other EU member counterparts. The result of this was the introduction of a new requirement for any companies applying for patent box relief in the future to also include details of corresponding R&D expenditure in order to qualify for the tax relief. This came into operation from July 1 2016 as our earlier blog on accessing patent box relief within the Nexus regime explains, but could potentially be revoked post Brexit.
Enhancements to R&D tax credits
The existing rules governing R&D tax credits allow qualifying companies to receive up to 230% in tax relief to cover allowable costs. In some cases it means they can eliminate their corporation tax liabilities. Post Brexit, the level of relief available will no longer be restricted in accordance with EU legislation. Apart from the cost of financing the scheme, there will be nothing to prevent the UK government from further enhancing it to stimulate the creation of UK based companies focused on innovation.
Our verdict on business tax post Brexit
Although these suggestions are merely speculative at this stage, they do highlight the opportunities that will become available to reform the UK’s business tax regime. Whatever happens between now, March 2017 and the suggested filing period of article 50 and beyond, we expect the UK Government will consult with the business community to create taxation policies designed to boost the UK’s economic strength both at home and abroad.
If you would like to discuss any aspect of business tax with us, please contact Lesley Stalker by emailing las@rjp.co.uk
