How will Brexit affect UK VAT regulations?

 Richard Asquith, VP of Global Indirect Tax at Avalara discusses how Brexit may affect the UK’s VAT regulations

 

Following the surprise announcement of a general election, the UK is set for a further upgrade on the uncertainty barometer.

However, in reality the dramatic electoral U-turn by prime minister Theresa May is likely to deliver a more secure political backdrop for the up-coming negotiations.

We may now see the UK starting to offer a more conciliatory stance after the election to help it secure a softer, more favourable EU exit. This could include the UK discarding the threat of transforming itself into a European tax-haven, aggressively competing with the EU for global investment.

Combined with the prospect of abandoning the David Cameron tax lock on rate increases, the fiscal momentum is moving towards tax rises.

Was the tax-haven threat even credible, and would surrendering now rob the UK of one of its few realistic post-Brexit economic models?

Whichever the case, the UK may still have to face the prospect of EU courts and laws having an unwelcome voice in the UK tax regime. This will be a blow for the pro-Brexit faction, who had imagined a clean break from the EU.

UK – the Singapore of Europe?

Under pressure from vocal Brexit members of the government, the Conservative leadership has been making thinly veiled threats of slashing UK tax rates, in order to attract global business if the EU plays hardball on access to the EU Single Market.

Many Brexit strategists have highlighted Singapore’s success as establishing itself as the pan-Asian tax-friendly regional investment hub.

The UK could mirror this tax haven strategy by; cutting taxes (UK corporation tax is already set to fall to 17% next year); providing favourable tax rulings for investment locating to the country; bolstering R&D tax incentives.

For example, the UK could fully re-introduce its highly successful Patent Box tax scheme that the EU blocked, following its success at encouraging German intellectual property investment to relocate to the UK.

Brexit promises dynamic tax sovereignty, but the reality may be tame

Is the prospect of a tax-haven UK even realistic? Many of the measures that Singapore and comparable tax friendly jurisdictions have adopted are open to the UK today, but unused.

Corporation Tax is probably as low as it can meaningfully go unless there are significant, politically risky cuts to expenditure.

The UK is also, in all likelihood, simply too big an economy in comparison to its EU neighbours. Singapore is successful because it is used as a launch pad into its much bigger neighbours of Malaysia, Indonesia and the titan of the region, China. Furthermore, Switzerland has probably already commandeered any tax-haven role for Europe, so there is no vacant or credible option open for the UK.

The UK will be free to fully control VAT on Brexit as it will be outside of the EU VAT Directive rules and regime. However, since VAT now accounts for around 20% of UK revenues, the government will be unable to significantly reduce rates or the rules beyond minor, crowd-pleasing cuts to goods such as e-books, women’s sanitary products and ‘green’ spend. Otherwise, expect few other changes to the tax regime.

The long arm of the (EU) law

If the tax-haven dream is to be a casualty of the post-election detente between the UK and the EU27, the Brexiters will still enthusiastically demand an end to the influence of EU laws and courts over the UK tax system. Alongside immigration controls, curtailing the role of the European Court of Justice (ECJ) and the European Commission (EC) over UK laws and tax policies, was a central motivation for the leave vote.

However, the ECJ is referred to in most UK VAT rulings and it will continue to be a source of reference post-Brexit for UK courts for international interpretations.

The EC, negotiating on behalf of the EU27 on the UK departure agreement, will also insist on a major role for the court in long-term UK legal and tax matters if the UK wishes to retain favourable trading access to the Single Market.

Post-Brexit, the EC will also be able to leverage its powerful anti-state aid investigative powers to examine and potentially overrule any biased tax rulings that the UK grants its national champions at the expense of EU businesses.

EU state-aid tax investigations, such as those currently targeting US multinationals in Luxembourg, Netherlands and Ireland, could easily be redirected towards the UK

Uncertainty barometer to stay red

If the UK June election polls are to be believed, the government is likely to be delivered with a broader, and  more flexible, EU-friendly group of MPs.

It cannot be certain what Prime Minister May will do with this extra freedom, but a softer Brexit negotiating line can be reasonably predicted. This will almost certainly mean the abandonment of the improbable UK tax haven threat and further tax cuts.

This will disappoint many of the stronger-minded Brexiters, which will be compounded by the realisation that the ECJ and EC will retain much influence over tax and other areas of UK law. Their reaction may yet sustain the uncertainly barometer in the red zone.

 

Richard Asquith is vice-president global indirect tax at Avalara and was previously Global Head of VAT at the TMF Group and Director of Finance at the BBC

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