Brexit – What about the people?

I asked  a colleague of mine, Melissa Dunkley, a simple (possibly stupid) question as to the impact of Brexit on the area of tax in which she specialises.  My ignorance was laid bare and a series of articles is the result.  This is the first.
Melissa’s company, MD Advisory Limited, is a specialist tax adviser, dealing with the tax and social security position for expatriates.  She advises on both UK nationals going overseas and foreign nationals coming into the UK.  Email her at: melissa@mdadvisory.co.uk
I hope you find what Melissa has to say as interesting as I do.  Below is her first article in the series.

There has been considerable commentary about the impact of Brexit on VAT, customs duty and the single market.  There have also been quite a few questions about the freedom of movement of UK and EU citizens and what this might mean in terms of labour market access and retirees needing healthcare in Spain. However, little has been said so far about the impact on personal income tax and social security contributions for workers, because most speakers on the topic of Brexit openly admit to knowing nothing about the subject.  So, it is time to start putting that right.

This will be the first in a series of articles on the issues for EU citizens working in the UK and UK citizens working in the EU.
Let’s start the series with the easy one, personal income tax.  Whether an employee pays tax in the UK or another EU country has nothing to do with EU law.  The liability to tax is governed firstly by the domestic income tax laws of the countries concerned. Then, if there is any area where more than one country is trying to tax the same income, the double tax treaty is used to solve the problem, either by preventing one country from taxing the income at all or limiting the tax it can charge and by ensuring foreign tax credits are given by the other country.

Double tax treaties are agreements between two individual countries, not groups of countries. Double tax treaties are not exclusively something between EU member countries, they are a global phenomenon. The UK has one of the most extensive set of treaties of any country and there are treaties between the UK and each one of the other EU countries.  So, leaving the EU will not change the personal income tax position of a UK employee working in another EU country, nor of an EU employee working in the UK.

Having said that, there is one area, which I think will be at risk and that is personal allowances.  Currently all UK tax residents are entitled to the annual personal tax-free allowance of £11,500. A person can have £11,500 of earnings before they pay any personal income tax. This is unlikely to change. However, what could be on the cards in the future is the availability of the personal allowance for non-residents.

Personal allowances are given not just to UK tax residents, but also to certain persons of the right nationality, even if they are not resident in the UK. In case you’ve never realised, the UK tax system is an openly racist one. Pre-6 April 2010, the “right” nationality included British citizens, Commonwealth citizens and EU/EEA citizens. So, a UK national working abroad with a small amount of income back in the UK, say from renting out their UK home while they were away, does not pay any UK tax provided the income is less than the personal allowance. It relieves a lot of unnecessary filing of self-assessment tax returns for individuals and it saves HMRC money since the cost of collecting the tax would exceed the amount of tax collected. From 6 April 2010, Commonwealth citizens were taken off the list of accepted nationalities. EU and EEA citizens couldn’t be taken off the list too as under EU law, citizens of other EU and EEA countries cannot be treated differently from British citizens.  So, Brexit could afford the UK another chance to make this change.

It might seem like a small issue but there are a great many EU citizens who are resident in their home country but who work occasionally in the UK and who are liable to UK tax when they do. Many, however, do not pay UK tax because the small percentage of their salary, which is liable to UK tax, is less than the annual allowance. This saves their employers, HMRC and tax advisers from a considerable admin burden of operating PAYE and then having to correct the tax paid later by simply taking them out of the UK tax system altogether.  It’s just one more thing that is going to make the UK a less attractive place to do business.

So, in summary, Brexit won’t change the personal income tax rules, but it could give the UK Government a chance to get some more tax out of EU workers, but at what cost?