Brexit – the glorious gorilla makes its presence felt
July 14th, 2016
The initial shock of the Bexit vote has passed and we now have a new Prime Minister and a minister in charge of Brexit negotiations. So the hard work on turning the vote into reality now begins. Taxation policy may not have been high on the list of issues which people considered when casting their votes, but there is no doubt that our negotiators will have to grapple with many complex taxation issues as part of the exit process. We all know the tax problems which can arise on a divorce or company demerger, so I can hardly begin to imagine the difficulties which will emerge when trying to demerge a whole country. Most corporate demergers involve a liquidation: let's hope we don't have to go down the route of liquidating UK Plc!
When I started my tax career European law was something which I could safely leave to my VAT colleagues. An adviser dealing with direct taxes could safely ignore Europe. How different things are today. EU law has had an impact on such core topics as group relief, transfers of assets abroad, furnished holiday lettings or R and D tax credits, to list but a few. So the big question is whether or not there will be an attempt to row back some of the changes to domestic law forced on us by the EU, or whether we will accept the status quo. If changes are to be made will they be retrospective? And what happens to tax appeals currently going through the courts on points of EU law if Brexit happens before all appeal routes are exhausted? One thing is certain – there is going to be plenty of work for lawyers, civil servants and tax advisers in sorting all of this out.
VAT is of course rooted in European Law. Etienne Wong of Old Square Tax Chambers, writing in Tax Journal on 1 July, analysed what he called the "umbilical cord" of Regulations, Directives and Rulings which linked UK VAT to the EU. Cutting that cord will involve more than a single chop of the knife. Directives have to be enacted in UK legislation whereas Regulations take direct effect. As far as rulings are concered the stakes are very high. Etienne referred to the ongoing Littlewoods case on resitutional claims as that "glorious 800lbs gorilla", because of the huge amounts at stake. £1.2bn in that case alone with other equally large amounts waiting in the wings. Very technical points about the future relationship between existing EU and UK court decisions could have a material effect on the UK economy.
What about avoidance? Robert Mass, writing in Taxation on 30 June, pointed out that the UK had taken the lead in the EU's crusade against tax avoidance and expected no changes to the UK's stance as a result of leaving the EU. I agree with him: the UK is not likely to go soft on tax avoidance. Indeed it is striking that the new Prime Minister talked about avoidance in her first speech on the economy: " it doesn't matter to me whether you're Amazon, Google or Starbucks, you have a duty to put something back, you have a debt to fellow citizens and you have a responsibility to pay your taxes". It is also worth remembering that much of the impetus for tackling avoidance has come from the OECD rather than the EU and even in these extraordinary times there is no suggestion that we should leave the OECD (if we do, remember you heard it here first).
So our life as tax practitioners will not change overnight, but I have no doubt that over time there will be significant changes to many parts of the system. Clients are already asking Brexit related questions, and only a few days ago I was talking to a corporate finance colleague who told me that a deal he had been working on for months had collapsed because of Brexit concerns. Francesca Lagerberg , also writing in Taxation summed it up well. 'The only certainty today is that the next few years will be uncertain as the UK charts new territory. In the short term it's unlikely that there will be dramatic tax changes but, as the weeks turn into months, the negotiations will begin to extricate the UK from its EU membership. A quick flick through the tax statutes shows innumerable references to European law, so this will not be a quick process. New negotiations and careful thought will be needed. And, of course, a new leader of the Conservative Party may want to bring in fresh thinking on tax. To misquote the well-known Chinese proverb, "we're living in interesting times". But this also means new opportunities; not least in helping clients cut through the complexities and plan for a different future.'
A final thought. The trend over the last few decades has been a shift away from direct taxes on incomes and profits to taxes on transactions and consumption. Undoubtedly this has been influenced by Europe. In theory this could be reversed, but I doubt it will happen. I can't see the political climate supporting higher levels of income tax, and so indirect taxes will continue to play a vital part in the overall balance of UK income. Post Brexit we could in theory abolish VAT and go back to purchase tax. I think that is as likely as… well in a world where Boris Johnson goes from leader in waiting, to yesterday's man, to Foreign Secretary within 10 days anything is possible, but I wouldn't throw away your copies of Tolley's VAT handbook just yet!
Former CIOT president, current editor in chief of Taxation and partner of RSM