So, in two years time the bell will toll, the ‘Great Repeal Bill’ will take effect and the UK will leave the European Union. What will this mean for our tax system?
The short answer is, in all probability, nothing especially dramatic. We probably won’t abolish any big taxes. We probably won’t become a tax haven. We probably won’t change all that much, at least initially.
Customs duties are one area where we can expect to see change. When we leave the EU we will (the government has confirmed) leave the customs union at the same time. Ahead of this day the government will need to legislate for a new customs system. Of course they might choose to import much of the EU system, but they will at the very least need to start treating trade with the continuing EU as imports and exports, with the bureaucratic challenges this will bring. World Trade Organisation (WTO) rules will mean that, if the UK and EU do not agree a free trade deal, the EU will have to place tariffs on the UK and, if we want to apply tariffs on any country, the UK will have to place tariffs on the EU.
VAT is a European tax, though as it is already incorporated into UK law it would stay in place even without the ‘Great Repeal Bill’ (the not entirely accurately named mechanism for incorporating all existing EU law into UK law on the day we leave). Outside the EU we will be free to raise, cut, tweak and fiddle with VAT to our heart’s content - and no doubt dozens of lobby groups will argue their cases – but that won’t make it a good idea. Abolishing VAT is probably out of the question, given the amount of revenue it raises. But one thing we can anticipate is uncertainty, both as the status of rulings by the EU court comes into question, once we leave its jurisdiction, and if we lose the guiding principles of EU law (proportionality, legal certainty, etc).
Direct taxes such as income tax and corporation tax, and transaction taxes like stamp duty, are little affected by EU law, so leaving is unlikely to see much change here either. The EU’s ‘state aid’ rules would cease to apply - though there are some WTO rules in this area which we would still need to follow - so the government could, if it chose, offer selective tax advantages to particular taxpayers or groups of taxpayers. Similarly we would no longer be bound by rules on free movement of capital so would be freer to discriminate between resident and non-resident companies and individuals, should we wish to.
Selective tax breaks are one of the inducements the government could offer if it wants to follow through on its threat to adopt an aggressively low-tax, pro-deregulation model if the EU attempts to impose ‘punitive’ terms on us. Further cuts to corporation tax are another lever that would move us in this direction. But the Chancellor has stated that Britain’s aim is to remain “a recognisably European-style economy with European-style taxation systems” so this would appear unlikely.
Counter-intuitively one effect of Brexit may actually be less change to the tax system. Up to 15 Brexit bills are predicted to hit Parliament over the next two years, leaving precious little time for other measures. This month’s slimline Budget (just 14 tax measures) may be a sign of things to come.
Brexit then, will probably not set the tax heather alight. Events elsewhere – US tax reforms, changes to the labour market, digitalisation – will likely change the tax system more in the next decade than our departure from the EU does.
Blog by John Cullinane, Tax Policy Director, Chartered Institute of Taxation
(this article appeared in City AM on March 30 2017)