Opportunities for UK fiscal policy outside the EU

 

One of the issues to deal with after the UK referendum vote is that many people went very long in doom and gloom and are now having to short their positions considerably. There will be volatility going forward but we need a sober analysis of both the risks (and we’ve had plenty of that) and the potential upsides of the UK outside the EU. I’m writing some blogs about a number of sectors which will appear shortly including forestry, little focus was given to the impact on Forestry, Agriculture and Fishing during the campaign but there are some important issues there.

Here I want to focus on tax policy. Now we do not know what sort of deal with be done, so some of my comments look at different options. Let me start with the practical. All member states spend significant resources on EU meetings (mainly from a defensive posture to ensure nothing adverse to their policy position is implemented). To the extent that Brexit means a decoupling from the EU, HMRC and HM Treasury will not be participating in EU events to the same extent as at present. The UK may become a stronger participant in the OECD and other multilateral fora as policy resources will no longer be used as much on EU policy matters.

For example, one only has to look at Common Base Taxation which has consumed a considerable amount of time over the last decade even though it was clear that the UK would not participate. Outside the EU, the UK will not participate and it is likely that UK multinationals which are affected will lobby through EU member organisations and governments, not the UK. Another example would be the unsuccessful process to update the EU Energy Tax Directive. There are plenty more.

Depending on the nature of the decoupling, the UK’s economic outreach policy will focus on markets and trade deals outside the EU and this will likely lead to a similar approach in tax policy. As the UK negotiates trade deals with non EU members, there will be pressure to address tax issues to facilitate this trade.

This trend would be accentuated if the EU and in particular the Euro zone moves towards a more common fiscal approach so that the 17 member Eurozone starts to look like one entity in international tax – this is the logical outcome of fiscal union. EC personnel have been arguing for a common EU approach to tax treaties for instance for some time – an EU treaty with the US rather than individual member states – and again this will change what HMRC/HMT have to deal with in the EU. It is also worth remembering that UK trade with the EU has been declining as a % of UK trade for some time.

Under some exit scenarios, the UK could no longer be subject to the the code of conduct – (The Code of Conduct requires Member States to refrain from introducing any new harmful tax measures (“standstill”) and amend any laws or practices that are deemed to be harmful in respect of the principles of the Code (“rollback”). The code covers tax measures (legislative, regulatory and administrative) which have, or may have, a significant impact on the location of business in the Union).

If this occurs then introducing measures to make the UK more attractive to inward investment like the IP box will be simpler to accomplish. The UK may therefore have more freedom to structure corporation tax to attract business subject to any OECD guidelines rather than EU rules. George Osborne has indicated a desire to reduce the corporation tax rate to 15% and may consider directly competing with Ireland. The government could include measures to retain HQ companies and functions.

Outside the EU, Cross border taxation between the UK and EU member states will revert to being governed by existing tax treaties on withdrawal and each will need to be examined to judge the impact compared to EU rules on transactions and structures. Some structures may either need to be revised and/or there may be a demand to revise older treaties by the UK and EU countries. In terms of protecting UK tax on UK profits, the UK may have greater freedom to challenge structures routed through EU states which transfer profits out of the UK. The obvious areas to look at would be structures with legs in Ireland, Luxembourg and the Netherlands.

UK policy on VAT will not have to comply with the EU framework with potential different use of reduced rates, zero rates and exemption. Rate setting will become a UK decision. The band within which VAT rates are allowed will no longer apply. The UK could consider radical reform of VAT by considering taxing say Financial Services and using the additional revenue to reduce the rate of VAT on other transactions to mke VAT less regressive as a tax, as at present some 40+% of transactions are exempt or zero rated. Reducing those non-taxable areas to 20% of transactions would allow a rate cut to roughly 15% with the same yield.

All of these options depend on the exact nature nature of the decoupling of the UK from the EU. However, there are clearly opportunities to reshape international tax policy in ways which are more closely aligned with the interests of the UK.

 

© Chris Lenon and www.green-tax.co.uk  2014-2016. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Chris Lenon and www.green-tax.co.uk with appropriate and specific direction to the original content.

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