6 minute read 1 Aug 2016
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Why Brexit will have tax and legal implications for life sciences


EY Global

Multidisciplinary professional services organization

6 minute read 1 Aug 2016
Related topics Tax

Life sciences companies need to understand the direct and indirect tax impacts of Brexit, and the potential consequences ahead.

The historic decision by the voters of the UK to leave the EU marks a significant change for the UK and EU and will impact other trading partners such as the US. However, all EU directives and regulations, as well as the treaties themselves, remain in force in respect of the UK until it formally leaves the EU. Therefore on a legal level, nothing has changed, and it is not expected to do so for the time being.

Do you have a plan for navigating the unknown?

While there is much uncertainty as to how the UK will untangle itself from the various EU institutions and what its future relationship will be, it is important for life sciences companies to understand the potential tax impact of this development and the potential consequences ahead.

From a business and regulatory perspective, there will also be interesting implications to life sciences companies, including:

  • Whether the UK will seek to continue to come under the banner of the European Medicines Agency and the European drug approval framework, rather than going off on its own
  • Clinical trial locations, as UK sponsors may not be allowed to benefit from the new EU central portal for submitting applications
  • Market access strategy and launch priorities, as only EU-based companies are authorized to apply or hold EU marketing authorization
  • Supply chain considerations, as products manufactured or imported in the UK may need to pass again through EU importation and quality control procedures to be marketed in the EU

General tax and legal issues

Treasury tax

The outcome of the vote was a surprise and has led to volatility in the markets, creating risks for companies in foreign exchange, interest rate and commodity prices, and may lead to even more active management of these risks by treasury departments. Businesses may, therefore, wish to actively review the tax regimes relevant to these activities.

Withholding tax

In the longer term, UK companies may no longer be able to benefit from the withholding tax exemptions in the Parent and Subsidiary Directive or the Interest and Royalties Directive once the UK leaves the EU. Not all existing UK tax treaties provide for a zero withholding tax, and taxpayers with UK subsidiaries or the UK as holding location may wish to review to the extent to which they rely on EU directives to mitigate withholding tax.

EU law cases

While the Leave campaign does not determine the actions following the vote, it stated that it would seek to prevent further repayments and interest being paid in respect of cases where UK tax law was found to be incompatible with EU law. Businesses involved in these and similar cases should urgently review their position.

EU tax initiatives

Subject to the terms under which the UK leaves the EU, it is unlikely that the UK will be party to various tax initiatives currently underway in Brussels such as the Anti-Tax Avoidance Directive, public country-by-country reporting and the common consolidated corporate tax base. However, where the UK has supported these initiatives, it is expected that the UK will continue to move forward with similar legislation.

UK “open for business”

The UK Government, now under a new prime minister, is likely to want to promote the UK business environment and set out further incentives for companies doing business in the UK. To this end, the UK Chancellor of the Exchequer, George Osborne, had indicated that he would like to cut the main rate of UK corporation tax to less than 15%. Osborne has now been replaced by Philip Hammond, and we await further announcements.


Given immigration was a key aspect of the debate during the referendum campaign, it is possible that the UK will not wish to maintain the free movement of people with the EU after it leaves. However, it has been indicated that EU nationals already in the UK will retain their current status.

The UK Government could introduce immigration restrictions for EU nationals from an earlier date by only giving new entrants unconditional leave to remain until the UK formally exits the EU. The UK may also wish to amend social security arrangements that the UK currently participates in for mobile workers in the EU.

State aid

The EU’s state aid rules may no longer apply to the UK after it leaves. At the moment, Her Majesty’s Revenue & Customs is seeking to recover aggregate levy relief that was found to constitute state aid. The European Commission is also engaged in a state aid investigation into aspects of the taxation system in Gibraltar.

Value-added tax

It is likely that the UK will largely retain the current system of value-added tax (VAT) on leaving. However, taxpayers would no longer have a right of appeal to the European Court, and the UK Government would have additional flexibility on setting the rates and scope of VAT as the VAT system moves away from the EU directives on which it is based. Businesses with UK or EU operations will need to review the VAT implications and pay close attention to the Brexit developments so that they can adapt to any changes.

Customs and duties

As a current member of the EU, the UK is part of a single market, and has access to a range of free trade agreements and applies the Common Customs Tariff. The Common Customs Tariff is managed by the EU itself, so after parting with the EU, the UK would need to legislate for a domestic tariff system. All movements from the UK to the EU and vice versa will become subject to customs declarations and formalities, and the UK will require negotiation of new trade relations with the EU as well as free trade agreements with third countries.

Capital duty

The UK has been required by EU law to remove the 1.5% stamp duty and stamp duty reserve tax on securities issued into clearance and depositary receipt services to comply with the Capital Duty Directive. Such issues are common in the case of US-listed multinationals. This requirement may no longer apply when the UK leaves the EU.

Impact on life sciences companies

For the life sciences sector, regulatory and supply chain issues will likely be front of mind. Whenever supply chains are restructured, direct tax consequences such as taxable presence or permanent establishment and transfer pricing need to be considered, as well as IT systems changes to reflect the new transaction flows. Systems changes will need to be put in place in any case to deal with VAT reporting on UK-EU transactions.

As far as tax policy and competitiveness are concerned, there has been no substantive discussion, but the UK Government’s scope for tax changes should be increased because the tax directives, European Community Treaty freedoms and state aid rules that constrain tax policy will no longer apply. This could provide the possibility to provide more regional or sector-specific incentives of which the life sciences sector could be a material beneficiary.

Next steps – in general

As businesses prepare for the UK to leave the EU, it is important that they consider the tax implications, including:

  • The immediate foreign currency, liquidity and trade impacts that have already occurred or will occur
  • Dividend and interest flows and associated withholding tax costs that would result from the UK being outside EU and the related impact on group structure
  • Supply chains and how EU trade flows and tariffs may increase costs
  • The tax impact of any restructuring and relocation
  • Issues relating to the cross-border movement of staff


Although the UK isn’t due to leave the EU until 2019, businesses will wish to use the intervening period to assess implications and verify that they can effectively manage the transition.

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EY Global

Multidisciplinary professional services organization

Related topics Tax