Tax Analysts Blog

Brexit Probably Won't Affect Taxes as Much as Everyone Fears

Posted on Jun 27, 2016

It is hard to overstate the magnitude of the shock wave emanating from the United Kingdom in the wake of voters' decision to exit the EU. The surprising victory of the Leave campaign will almost certainly prompt introspection on the part of EU leaders and force the next U.K. prime minister to confront the serious possibility of a major recession and tangled trade policy. Where the Brexit vote might have a more subtle impact is on the U.K. tax regime. While the United Kingdom might gradually opt to diverge from the EU's VAT rules and will be spared a potential state aid investigation, the effects will be small and likely won't be truly felt for years.

Regardless of what pro-EU British politicians and experts might be pontificating about today, Brexit will profoundly affect the United Kingdom's immigration policy and its relationship with the EU (David Cameron's successor is almost certainly not going to accept a Norway- or Switzerland-like relationship with Brussels, which is the fantasy of dispirited Remain leaders). And regardless of what Leave supporters are saying, the United Kingdom won't be able to wave a magic wand and have the same beneficial trade relationship with Europe that it has today, minus overbearing regulations and undemocratic bureaucrats. But the U.K. government isn't going to suddenly scrap its VAT or even change the rate just because it can.

First off, it's not clear that anything can really happen until the exit process is complete. That process can take up to two years and hasn't even started yet because Cameron says he won't invoke article 50 -- something he will leave to his successor (who might not take office until October). Even if the United Kingdom could act on the VAT today, it won't get rid of it (the EU requires members to have a VAT of at least 15 percent). The VAT raises ₤115 billion a year. What the government might do is apply the VAT a bit more selectively. It could exempt energy payments, for example, which would provide a boon to the working class (although it wouldn't be loved by green advocates). Or it could finally exempt intermediate insurance activities, something the United Kingdom has been fighting in EU courts to do. But none of these would essentially change the character of the VAT. Cameron's government, in fact, has been pushing higher VAT rates so it could cut corporate taxes. An exit from the EU probably means the government will need to keep providing a favorable tax climate to attract investment and keep U.K.-based multinationals from leaving. So expect to see the same tradeoff between VAT and corporate rates in the future.

The European Commission has been digging into transfer pricing agreements that it believes grant impermissible state aid to companies. So far the investigation has not extended to the United Kingdom, but some believe that HM Revenue & Customs, which is notorious for providing generous agreements, might have been on the commission's list for future investigations. Obviously, if the United Kingdom isn't in the EU, it won't have to worry about having its dirty laundry aired by the commission.

Perhaps the biggest tax change from Brexit will involve EU courts. The United Kingdom has been very aggressive about trying to collect tax, and it has been frequently thwarted by the Court of Justice of the European Union. HMRC litigators probably won't be sad about no longer being subject to European jurisdiction.

Brexit will change the United Kingdom significantly. It will alter U.K. trade, immigration, governance, and financial policy, among many other things. Perhaps over time, the country's tax system will change radically as a result of leaving Europe, but in the short term, tax is probably the least of its worries as it sorts out many more pressing issues.

Read Comments (1)

Bob GoulderJun 29, 2016

I agree with your views here on VAT. The Brits would be crazy to mess with it. Not because they love all those volumes of EU VAT regulations, but because VAT pays the bills. Maybe they grant a few exemptions for the insurance sector; I doubt the tinkering goes much beyond that. (Did I mention that VAT pays the bills?)

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