How Has Brexit Impacted Corporation Tax Rates?

Brexit, the departure of the United Kingdom from the European Union, happened on 31st January 2020. According to economists and analysts at Cambridge, this exit of Britain from the EU will result in 32% less investment, 5% fewer exports, and 16% lower imports by 2035. Among other changes, Brexit has affected the corporate sector on a large scale. If you are from the corporate sector and want to know how Brexit has influenced corporate tax rates in the UK, then this article is a must-read for you.

 

Corporate Tax Rates and Brexit in the UK

Corporate tax is the amount of tax paid by the companies on the yearly profit they have earned. The corporate tax main rate is 25%, set by the HMRC; however, if the company has not generated enough revenue, then it is not liable to pay the tax for the financial year.

How has Brexit Influenced Corporate Tax Rates in the UK?

Brexit influenced corporate tax rates in the UK in the following ways:

• Increased tax rates after Brexit are imposed on companies. Along with corporate tax, there is also a withholding tax of 10% paid by the subsidiary companies operating in EU countries.
• The exit from the EU treaty has given the UK the ability to formulate its own strategies regarding taxation, thus generating revenue and removing implicated liabilities under the EU treaty.
• The exit has created competition between the EU and UK corporate sectors. Therefore, companies need to check carefully new tax rules before starting operations from the UK or EU.

What are the Significant Changes after Brexit?

The UK government brought some changes to corporate tax after Brexit. At the moment, the corporate tax rates in the UK are lower than in EU countries, making it ideal for investment and business; however, the changes after Brexit include

1- Increase in corporate tax

There is a possibility of an increase in tax by the government to overcome the financial offset of Brexit

2- R&D tax credits

For research and development businesses, the government may plan a relief in taxes, giving them a chance to grow. Direct taxes include corporate tax, PRT, income tax, capital gains tax, stamp tax, etc. After Brexit, the UK government is free to design its own tax policies, which were otherwise difficult because of the treaty with the EU.

Post and Pre-Brexit

The UK government increased its corporate tax rate from 19% to 25% for companies earning a yearly profit of more than £250,000. On the other hand, making sudden changes in the corporate tax makes the UK less attractive. However, the head offices of several multinational companies are located in the UK due to favorable tax rates and other domestic benefits available before Brexit.

Companies operating in the EU countries were not liable to pay withholding tax under the treaty act; however, following Brexit, the UK decided that subsidiary companies would pay a withholding tax of 10%.

Being in the EU

The UK enjoyed many benefits of trading with the United States. One of the benefits is the rule called “limitation on benefits.”. This rule allows companies to enjoy tax benefits even if they don’t meet the requirement, but for this, the company must belong to the EU, EEA, or NAFTA. As the UK exits the EU, its companies are liable to pay taxes that were otherwise omitted. However, this changed after the competent authority agreements between the United Kingdom and the United States in 2021.

The agreements regarded the United Kingdom as still a member of the European Union under the UK and double tax treaty. This allowed UK companies to enjoy the limitation rule even if it did not meet the requirements of tax relief. This does not apply to non-UK companies operating through the UK, although companies depend on UK citizenship shareholders for tax relief.

How are Tax Relief Claims Relevant in this Regard?

Although the corporate taxation system in the UK is domestic, it is influenced by the EU. In some cases, the UK government has to allow tax relief on cross-border tax payments so the freedom of taxpayers is maintained. Similarly, the UK government has allowed group tax relief claims under the Finance Act 2000. The group tax relief claims are for companies working as subsidiaries in the United Kingdom with a parent company operating from a different EU country.

Since Brexit influenced corporate tax rates significantly, the UK government has made noticeable changes in corporate tax to ensure revenue generation and also maintain the authority of its domestic corporate legislation. However, the terms described in TCA give limited freedom to the UK for making changes in corporate tax, and it restricts the UK from creating a level playing field for companies operating across borders; however, this will not prevent the UK from making changes in the future as well.

 

Conclusion

Brexit has given greater autonomy to the UK regarding bringing changes in its corporate taxation rules. However, it has affected the trade benefits it enjoyed with the US while being in the EU. Brexit influenced corporate tax rates by creating a whole new competition between the EU and UK regarding subsidiary companies’ parent companies and withholding tax rates. In general, Brexit has taken the authority of the UK in EU tax matters; however, due to domestic legislation, the UK has retained its power in domestic policymaking.

Disclaimer: All the information provided in this article on how has brexit impacted corporation tax rates, including all the texts and graphics, is general in nature. It does not intend to disregard any of the professional advice.