Leaving the EU would free the UK from tax commitments, but mirroring those obligations might be a condition of a deal
Brexit and taxation are not two subjects mentioned in the same breath that often. But as a leader of a support business for the financial planning sector, it’s a combination I thought was worth giving a little thought to. To start with, and self-evidently, any type of Brexit that doesn’t incorporate the same level of freedom of services as that available to a “full member” will inevitably be detrimental to the UK’s financial sector.
Most seem to agree that, at best, it is likely to be some time before any “compensatory” deals on services outside the European Union are done.
Be that as it may, good financial planning should incorporate a degree of anticipation, and some appropriate “hedging” where there is uncertainty over potentially material changes.
The outcome of the Brexit debate remains the very definition of uncertain. In the words of The Clash, “should I stay or should I go”?
Regardless of your own particular views on the rights and wrongs of Brexit, it cannot be denied that some form of it is more than a distinct possibility. So what would the likely impact on direct taxation be and what, if anything, can be done now to hedge against the anticipated outcomes?
Limited tax harmonisation
First, it’s essential to recognise that whatever the aspirations of some hard-line supporters of a fully confederate Europe, there has been very little progress towards EU tax harmonisation among member states. Any such change needs the unanimous approval of all members, and the UK has not been alone in consistently opposing any form of harmonisation. There have been some moves towards the establishment of a common consolidated corporate tax base, but we are not really any nearer to that.
“Approximation” of the tax codes between member states is about as far as we have got. Since the early 1960s, in relation to direct taxation, the commonly understood objectives among member states have been eliminating double taxation, enhancing co-operation between national tax authorities and stepping up efforts against cross-border tax avoidance. These objectives have been gradually broadened to include:
- Eliminating all other tax obstacles hindering cross-border business activities and investments within the single market;
- Enabling co-operation between tax authorities to exchange information and assist one another in recovering tax claims;
- Countering tax evasion and tax strategies that attempt to reduce liabilities by misusing rights under EU law.
However, EU member states, in determining their own tax codes, do have to ensure there is no “tax discrimination” between citizens and businesses across the bloc.
For a number of years, individuals and companies have challenged national direct tax provisions allegedly hindering the exercise of fundamental freedoms, in particular the freedom of establishment, the free movement of workers and
the free movement of capital.
National tax provisions of both home and host member states have regularly been found by the European Court of Justice to be in breach of EU law, creating a process of “negative integration”, specifying which direct tax provisions member states should not introduce or maintain, and obliging them to amend or repeal such provisions.
The ECJ has consistently stated that, although direct taxation falls within the competence of member states, they must exercise that competence consistently with EU law. Overall, ECJ case law has constrained member states from using direct taxation to create differential treatment between domestic and comparable cross-border situations within the EU, thereby taking important steps towards creating a level playing field across the single market.
Once outside the EU (if that is what happens), we will, on the face of it, be freed from needing to comply with alignment (the core freedoms), and the principle of equivalence and non-discrimination. However, as part of a post-Brexit deal with the EU, it is likely that some mirroring of the commitments of member states will be a condition of any agreement.
Subject to that, we will almost certainly continue to offer a low-tax zone – especially for businesses – as a material attractor to the UK. The current corporation tax rate of 19 per cent, set to fall to 17 per cent from 1 April 2020, is a great example of this.
Of course, a change of government and a radical change in taxation policy, possibly linked to a more radical redistribution philosophy, may (indeed, almost certainly would) militate against this continued benign state, in relation to corporate tax rates in particular.
More time to govern?
An indirect result of resolving the interminable Brexit process will be that the government will have a little more time to actually govern.
One might expect, as a result, to see greater consideration given to, and possibly legislation relating to, some aspects of the tax and financial planning process, for example pensions and estate planning. Stranger things have happened.
Tony Wickenden is joint managing director of Technical Connection (a St James’s Place Wealth Management group company). You can find him Tweeting @tecconn