UK General Election results and Brexit

Japan tax alert 19 December 2019

The Conservative party have won the General Election and secured a clear majority as the next UK Government, which they can use to implement their campaign promises. First and foremost this will mean a focus on the Brexit Withdrawal Agreement Bill, but there will be tax changes and issues to be addressed in the February Budget.

Brexit

Prime Minister Boris Johnson has said that he will introduce the Withdrawal Agreement Bill on Friday, 20 December, so that an initial vote by MPs can take place on Monday, 23 December. Once the Withdrawal Agreement Bill is passed, the European Parliament still needs to ratify the deal before 31 January 2020 for Brexit to happen.

If, as now appears likely, the UK does leave the EU on 31 January 2020, it will then enter the 'transition period' which is currently scheduled to end on 31 December 2020.Although there is provision to extend the transition period by one or two years, Boris Johnson has previously said that he does not intend to extend the period. While within the transition period, the UK essentially remains part of the EU. Once the transition period is over, the UK will no longer apply EU tax directives, including the Parent- Subsidiary Directive and the Interest and Royalties directives, which eliminate withholding tax on certain flows between Member States. Also the Merger Directive, which permits a tax neutral mechanism to merge UK companies with EU companies. Companies should review their withholding tax position from January 2021 as unless the transition period is extended, new agreements are reached or the groups themselves restructure they may face additional costs.

During the transition period, the EU and the UK will negotiate the future relationship. The agreed political declaration calls for a comprehensive free trade agreement (FTA) with zero tariffs on most goods and services and minimal border checks. While Boris Johnson has said that concluding such an FTA is possible in the 11 months to December 2020, many other political figures in the UK and the EU hold different views. There remains a significant risk that, while the UK may now leave the EU with a 'deal' ratified by the Conservatives majority, businesses may be subject to additional costs and disruption from 1 January 2021 if a deal on a FTA cannot be concluded in time. These risks may be added to if the current issues with referring trade disputes to the WTO appeals court continue.