Few thought it possible, but it finally happened a year ago: Brexit. The United Kingdom voted to leave the European Union, leaving the world astonished. Many asked how the English could have been so stupid as to leave the EU, but it was decided and only time will tell if it was for better or worse.
The UK has always offered great and interesting options to entrepreneurs and Brexit won’t change this in any way.
Today, we are going to talk about the fiscal effects of Brexit on entrepreneurs that already have businesses in the UK and those that are thinking about starting one. Plus, we will analyze the possibilities offered to foreigners who are looking to set up their tax residence here.
Without a doubt, leaving the European Union will have many short-term disadvantages, but from the point of view of flag theory, surely it will end up being a positive.
Political consequences from the offshore perspective
With Great Britain’s exit from the EU, we draw closer to a time of greater legal uncertainty. Ultimately, the exit still needs to be negotiated and brought about. The process is expected to be drawn out over various years. The extent to which there are changes to the important points is yet to be seen.
EU officials want to set an example. There is a lot at stake for them. It’s unlikely that England will renounce the free circulation of people according to the Swiss example so that they don’t lose access to internal EU markets.
It’s possible that it will remain relatively easy for EU citizens to obtain UK residence. However, there are very interesting internal political consequences for the UK.
For example, Scottish politicians have announced that they will propose a second independence referendum. Given that the majority of Scots were in favor of staying in the EU, many expect a successful Scottish secession. From a flag theory point of view, this would be fantastic. It would mean the creation of a new country with an Anglo-Saxon legal system, offering a chance at a non-domiciled tax-exempt residence. Also, Scottish businesses—like limited partnerships—are interesting vehicles in international tax organization. Plus, in the case of Scottish secession and the country’s entrance into the EU, it could be a new option for tax exempt companies within the EU.
There has been an increase in calls for secession from Northern Ireland, Wales and even the City of London. Other small independent States with a British background will surely create more options with respect to flag theory; at the same time, political consequences in the heart of England shouldn’t be underestimated. After all, an England without Scotland, Wales and Northern Ireland—regions where the Labour Party is traditionally strong—would assure conservative British Tories a governmental majority in the long run.
It’s likely that the Labour Party would disappear in a centralized England owing to its insignificance. In contrast, the Tories would try to mitigate the damage done by an EU exit, taking a liberal economic direction.
However, there is a small State dependent on the UK that will be met with special difficulties: Gibraltar, the small, well-known tax haven. Located at the southernmost point in Spain, Gibraltar depends in large part on the EU. This explains the results of the referendum there, with 96% of the population against Brexit.
We will have to wait in order to observe the effects exiting the EU has on Gibraltar’s offshore sector. Many companies moved to Gibraltar tax-free because of its close proximity to the EU market; this sector could promptly dissolve into thin air. On the other hand, Gibraltar was never really an attractive residence from a tax point of view. In the case that it remains completely isolated from Spain, it’s likely that Gibraltar will go back to granting foreigners more tax advantages in order to seem more attractive.
Political consequences from an offshore perspective
The fact that Great Britain is suffering economically because of Brexit is a short-term consequence. Of course, the financial sector of London will suffer a heavy blow by leaving the EU. European financial centers, like Frankfurt, will benefit enormously from these circumstances. In London, in contrast, offices will close.
But the United Kingdom has more to offer than just the financial sector. Free from the yoke of European regulations, the small and medium English companies will be the ones to benefit.
To assure competitiveness, the Tories will continue to deregulate. After all, after an initial downward trend, there will be a considerable strengthening of the British pound in the long run, as I will explain below. Depreciation isn’t an option for the UK.
Even if it loses access to the internal European market, the UK can overcome this. Ultimately, Great Britain has always oriented itself toward the Atlantic rather than continental Europe. Especially considering the large Commonwealth States like Canada, Australia and New Zealand, there will be interesting possibilities for a new economic union and free circulation of people that wouldn’t repeat the EU’s errors.
The question of how the British pound will evolve as a currency is also interesting. Delocalization expected from the large financial industry towards EU countries will hurt the pound in the short-run. However, in the long-run, it is expected that the British pound will recover.
It’s no coincidence that the EFTC countries with their own currency, Norway and Switzerland, have the strongest currencies. The UK hasn’t lost the potential to achieve this.
The consequences of Brexit for UK residence
Having a residence in Great Britain has always been an interesting option. The non-dom tax advantages are obtained very easily during seven years spent in the country as an EU citizen. Furthermore, moving your domicile to the United Kingdom—a country without a census office, by the way—offers a large variety of possibilities. For example, you can validly change your name anywhere in the EU, apply for a British driver’s license with this second identity, and then open bank accounts that same day in the Anglo-Saxon country with only this license as your ID. This is a possibility that exists today.
I already mentioned that we don’t necessarily expect an end of free circulation. Great Britain was never a part of the Schengen Zone; it has always had border controls. But, in the EU and England’s mutual interests, European Union citizens will continue to visit, live, and work in the United Kingdom just as the British will continue to do in the EU. Even if this doesn’t continue, the UK won’t be completely isolated. A non-dom, tax exempt residence will continue to be a possible framework for many people, if not directly in the UK, then eventually in the independent State of Scotland.
Aside from the question of difficulties in emigrating to the UK after Brexit, the question is what English residence means from a fiscal point of view.
The non-dom system will be further strengthened with its exit from the EU. The United Kingdom will no longer need to defend this Anglo-Saxon tradition against attempts at harmonization from Brussels.
It’s likely that Great Britain will no longer apply the strict international tax laws or counter-avoidance provisions found in the framework of the EU’s BEPS initiative.
The United Kingdom’s general tax system will also come out on top. In order to be more competitive, it’s possible that the conservative government will lower certain taxes.
If they are truly going to create closer ties with Australia, Canada and New Zealand, this will offer additional advantages. Ultimately, it’s precisely these countries that are known for their strict immigration laws regulated by a points system.
Brexit’s consequences for English limited companies
For many owners of English limited companies, there will be few changes, and most will be for the better. For example, they’ve decided to lower the corporate tax from 20% to 18% in 2018 and will likely implement another, greater reduction.
Little will change in relation to the general legal capacity of these British businesses. In the end, one of the fundamental principles of our legal order is the validity of legal acts that have already been passed–for example, the incorporation of a limited company in another country–can’t be revoked when the legal situation changes. With this, European states are required to recognize English limited companies’ legal capacity both before and after Brexit comes into effect.
In the same way, the potential exit from the intra-communitary VAT zone presents the same advantages and disadvantages. While we don’t expect the elimination of VAT, a reduction lower than 15% is possible, which is at the moment prohibited by the European Union. It’s also possible that VAT would only be placed upon income coming in at the local level, not foreign commerce.
An English limited corporation could then, similar to what is done in Canada and the US, become a prized destination for doing businesses with high tax pressure, without the burden of VAT.
Nonetheless, this will become a problem for all those that had enjoyed the old VAT regulations in the United Kingdom. For example, it used to be possible to use a European tax identification number with the higher threshold of €106,000, but only retain VAT starting at six figures (the limit 2017 is £85,000). This will especially impact those business-owners that needed a European tax identification number for imports and exports in the EU.
Straying towards other countries was never a good option, given that the VAT collection threshold isn’t generally very high (like in Germany, where in the special tax system for small business-owners the threshold is €17,500). The highest VAT thresholds after Brexit are now in neighboring Ireland at €75,000, which also has more attractive types of taxes, at least within the corporate tax framework at 12.5% tax (well, until quite recently; soon I’ll show you another option within the EU).
Because of this, an exodus of British limited companies is expected towards the always attractive, but less well-known, Ireland (which we talked about in another article).
At the same time, English limited companies will become more and more interesting because they could eliminate some of the EU’s regulatory dispositions. To strengthen the country’s competitiveness, it’s possible they’ll implement a series of additional measures that could simplify the establishment and administration of these limited companies.
Brexit will also have consequences for onshore and offshore businesses all across the world. Public registers, called upon for some time now by the EU for offshore companies and trusts, won’t be created as quickly now.
It will also be interesting to see how Great Britain positions itself in relation to the automatic exchange of information, also with respect to its overseas territories and colonies.
From an offshore perspective, Brexit could have very positive repercussions which would considerably hinder the State’s snooping in bank accounts and other financial assets.
Consequences for offshore banking
England could become an incredibly interesting country for offshore banking. After all, exiting the EU implies an end to the exchange of information with the European Union.
The other framework conditions in the UK are favorable. As a country without tax at source on interest and dividends, it has always been very attractive for foreigners- The United Kingdom has its problems, but it is a State with stable laws and a long tradition of protecting property rights.
From this perspective, it’s quite likely that Brexit will produce a flight of capital to Great Britain originating from the numerous EU-opponents in other countries.
Also, British overseas territories, like the Cayman Islands, Anguilla, and the British Virgin Islands, along with Crown dependencies, like the Isle of Man or the Channel Islands, will be strengthened by Brexit. Protected by the motherland, it will probably be a while before they introduce mandatory business registers and automatic, multilateral information exchange.
In conclusion, will the United Kingdom continue to be of interest even after Brexit?
Brexit puts the United Kingdom before an uncertain future. In contrast to what the media would have us believe, this isn’t necessarily a bad future. From an offshore perspective, a Great Britain independent from the EU could offer an important counterpoint to the European Union’s totalitarian aspirations. The United Kingdom will continue carrying out its central role on the world stage as a country with rule of law and free trade, perhaps now more than ever.
Although some business-owners are suffering the consequences of Brexit, in the long-run, British independence will open up big opportunities for everyone, whether it’s the creation of limited companies, non-dom residence or protection of wealth.