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GPMI Education

Questions Remain About Impact of Brexit on Income Tax, Payroll

By Kiko Martinez

1475042812_49813The U.K.’s ultimate withdrawal from the European Union (EU) will have “surprisingly little” impact on income tax withholdings after the Brexit vote last June, according to global payroll expert Tim Kelsey, MCIPP, AIPA. That’s not to say, however, there won’t be other aftereffects from the decision to leave.

During the recent Global Payroll Management Institute (GPMI) webinar “Brexit: Payroll Implications, What Next,” the founder of U.K.-based Kelsey’s Payroll Services explained that while the country is in an “uncertain position at the moment,” the likely outcome of Brexit is that tax withholding obligations would continue as is, but issues such as tax allowances could suffer.

Brexit, a combination of “British” and “exit,” is a referendum on which British citizens voted on June 23 to leave the EU over disagreements on a number of issues, including immigration, legislative power, trade, and economic investment. The vote was 52% to 48% in favor of leaving the 28-member-state union. The U.K. has been a member of the EU since 1973, when it was known as the European Economic Community.

When the U.K. finally leaves the EU (it has two years to negotiate the departure), Kelsey said that because there is no general requirement to enforce income tax withholdings across national borders within the EU, income tax obligations should not change.

“The EU does little in terms of standardizing income tax deductions and the requirement to withhold those taxes from people’s salaries,” Kelsey said.

What might change, however, are the EU’s tax allowances and reliefs for U.K. citizens. All EU countries will award tax allowances to EU citizens at the same level as a citizen of that particular country. For example, if you bring a short-term business into the U.K. from another EU country—and do it without a Double Taxation Agreement protection—you get a personal tax allowance in the U.K. of £11,000.

“That means you can earn that sum before you pay any income tax,” Kelsey explained. “Knowing you have this allowance up your sleeve is extremely useful. If that allowance goes away, will that make bringing short-term businesses from EU countries into the U.K. a less popular move?”

Kelsey hopes that when the U.K. leaves the EU, it decides to remain in the European Economic Area (EEA) (like Norway and Switzerland). This means, the U.K. would “retain the freedom of movement of goods, capital, people, and services,” which Kelsey considers “core principles of the EU.”

“Any EEA citizen has the right to live or work in any other EEA country without the need for permits or visas,” Kelsey said. “This would mean business as usual.”

For example, if a financial institute in New York City hires a U.K. citizen to work in its N.Y. office, but requires him or her to travel regularly to work in Europe, there would be no need to obtain immigration paperwork.

“It’s difficult to see how the U.K. can leave the EU and still participate fully in this freedom of movement,” Kelsey said. “That doesn’t mean that U.K. citizens who are required to travel to Europe on business see the door slammed shut, but it probably does mean we’ll have to think about additional paperwork and permissions.”

Only time will tell what other changes will occur because of the Brexit decision. Because an official withdrawal date has not been established, businesses can only presume what will be the final result of this union-altering vote.

View the entire webinar, “Brexit: Payroll Implications, What Next.”