The Effects of Brexit on International Tax Agreements

What is Brexit?

Brexit was the withdrawal of the United Kingdom from the European Union which happened in January 2020, making the UK the only sovereign country ever to have left the EU. The UK joined the EU – then called European Communities (EC) – in January 1973 under the Conservative government of Edward Heath. Just two years later in June 1975, the UK – now led by Labour Prime Minister Harold Wilson – held a referendum as to whether to remain part of the EC but of the 64.6% of the population that voted, 67.2% were in favour of remaining. Since then, the EU and its institutions grew to be of significant economic and political importance to the UK and the question of leaving the EC/EU did not arise again until around 2010.

Prior to the 2010 general election, the then Conservative leader David Cameron promised that should he be elected, he would hold a referendum on the Lisbon Treaty, which forms the constitutional basis for the EU; however, he backtracked on this promise after all other EU countries had ratified the treaty ahead of the elections (which Cameron won), later saying in 2012 that he would hold a referendum about Britain’s future relationship with Europe when the time was right.[1]

In January 2013, Cameron delivered the Bloomberg speech in which he promised that, should the Conservatives win in the 2015 general elections, he would negotiate more favourable arrangements for Britain’s membership in the EU and then hold a simple ‘in-out’ referendum. Cameron stated that although he would campaign for the UK to remain part of the EU, he also believed it was time for British people to have their say on the matter.[2] Despite warnings that the EU was not an “á la carte menu” from which he could pick and choose, Cameron outlined the changes he aimed to bring about in his negotiations with the EU ahead of his proposed referendum. This included: additional immigration controls, especially for citizens of new EU member states; tougher immigration rules for present EU citizens; new powers for national parliaments collectively to veto proposed EU laws; new free-trade agreements and a reduction in bureaucracy for businesses; a lessening of the influence of the European Court of Human Rights on British police and courts; more power for individual member states, and less for the central EU; and abandonment of the EU notion of ‘ever closer union’.[3]

Cameron signed a deal with the EU in February 2016 that these changes would be implemented should the British public vote to remain a member state of the EU. The referendum, which was held in June 2016, resulted in 51.9% of the turnout voting leave to 48.1% which voted to remain. As a result, the deal was made redundant, and Cameron’s proposed changes were never implemented. Following the referendum, Cameron resigned and was replaced by Conservative party member – and fellow remain campaigner – Theresa May who guided the UK through its most tumultuous years in history. After May’s draft withdrawal agreement was rejected by Parliament three times, she resigned as Prime Minister and was succeeded by Boris Johnson who eventually signed the Brexit Withdrawal Agreement on 24^th January 2020.

How did Brexit affect UK tax agreements with the EU?

Under the Brexit Withdrawal Agreement signed by Johnson, the UK was to continue being treated as a member state through its ‘transition period’ until the end of December 2020. As of January 2021, the UK is no longer bound by EU laws and regulations of which the main benefit is that the UK ultimately has greater freedom to manage its own money and set its own taxes – including taking back control over VAT rates.[4] In practice, however, this freedom has been minimised by the economic and political reality of the increased administrative costs for UK businesses complying with different taxation systems in EU member states.[5]

Additionally, Brexit has removed the UK’s power to influence EU-level tax matters, but this has had no impact on the UK’s extensive double tax treaty (DTT) network. A DTT is a bilateral agreement between two countries with the aim of avoiding double taxation on the same income, and to also stop those who attempt tax evasion. Although DTTs are part of the International Public Law, they directly affect those who are either holders of a double citizenship or reside in one country and/or produce income in the other country[6] – more commonly known as someone with ‘non-domiciled status’, sometimes called a non-dom. Non-doms pay UK tax to the UK government like all regular UK residents, but they do not if both of the following apply: (1) the money amounts to less than £2,000 in the tax year; and (2) you do not bring them into the UK via a UK bank account.[7]

Despite leaving the EU, the UK has continued to show its commitment to the Base Erosion and Profit Shifting (BEPS), an anti-avoidance project driven by the Organisation for Economic Cooperation and Development (OECD). The BEPS project is a collaboration of over 135 countries aiming to put an end to tax avoidance strategies which exploit gaps and mismatches to avoid paying tax. The OECD estimates that USD$240 billion is lost annually due to tax avoidance by multinational companies, the equivalent to 4–10% of the global corporate income tax revenue.[8]

Whilst still committed to BEPS, the UK can now implement its own policies and is no longer required to follow EU directives due to Brexit. An example where the UK has diverged from agreed EU rules is DAC6 (Directive 2018/822), which is a ‘mandatory disclosure regime’ requiring taxpayers and intermediaries – such as lawyers, accountants, and tax advisers – involved in tax ‘arrangements’ to report these to their local tax authorities.[9] Instead, the UK have implemented a reporting regime based on the OECD’s Mandatory Disclosure Rules (MDR), which in simple terms just means the UK has much lighter regulations on cross-border tax activity.

One of implications of this is that it has increased the number of UK residents with offshore accounts – or at least benefitted those who already did. The main offshore jurisdictions within Europe are Andorra, Cyprus, Denmark, Germany, Gibraltar, Guernsey, Ireland, Isle of Man, Jersey, Lichtenstein, Luxembourg, the Netherlands, and Switzerland. Before Brexit even happened, many newspapers published stories about how the ardent supporters of the leave campaign were those with ‘offshore interests’ and did not care about the moral or ethical issues surrounding the offshore world.[10]

The fear of the UK abandoning the EU’s DAC6 is that the last global financial crisis of 2008 was spurred on by similar deregulation of stock market listings, notably in the UK by Margaret Thatcher in late 1980s which helped lay the groundwork for the crash.[11] And so, many worry that, on top of the estimated £42.5 billion that the UK must pay back to the EU because of Brexit,[12] the UK might face another economic crash. Already, a 2022 study by the Chartered Institute of Procurement and Supply found that UK goods trade was 11.2% lower in September 2021 than it would have been according to the Office for Budget Responsibility’s forecast made back in March 2016.[13] Analysts are predicting that having left the EU will continue to adversely affect the UK economy in the longer term, but with the ongoing political uncertainty in the British government right now, it is remains unknown if the situation will better or worsen.

[1] Cameron, David Cameron

[2] RTE, David Cameron pledges EU referendum if Conservatives win next election

[3] Ross, David Cameron

[4] HM Government, The Benefits of Brexit, 8–9

[5] Simmons & Simmons, Tax after Brexit

[6] Kalifatidou, The Double Tax Treaty between the UK and Spain

[7] Gov.uk, Tax on foreign income

[8] OECD, International collaboration to end tax avoidance

[9] Sovereign Group, UK to replace DAC6 with OECD’s MDR rules

[10] Garside, Osborne, and MacAskill, The Brexiters who put their money offshore

[11] Shaxson, What does Brexit mean for tax havens and the City of London?

[12] BBC News, Brexit divorce bill

[13] Hazlehurst, Brexit