Tax Analysts Blog

A 'Brexit' Would Mean More if Labour Were In Power

Posted on Feb 22, 2016

The prospect of the United Kingdom pulling out of the European Union is now much more than theoretical. Having cut his deal with the European Union, U.K. Prime Minister David Cameron announced that the long-promised referendum on leaving the EU would be held on June 23. A British exit from Europe would have major repercussions on trade and immigration policy, but its effect on tax would be much more significant if there were a Labour government.

Cameron's deal with other EU leaders was designed to allow him to campaign for staying in the union, but it has been widely panned by the largely Euroskeptic British press and by members of his own party who expected much more. In fact, London Mayor Boris Johnson and Justice Secretary Michael Gove (a close friend of Cameron) have announced that they will campaign in favor of a Brexit. Both prominent Tories have said that Cameron didn't get nearly enough autonomy from Brussels, particularly in the area of migrant worker benefits.

Gove and Johnson will be joined by other cabinet members, and even a large portion of the Labour Party (which is officially campaigning for staying in the EU). This makes the prospect of a Brexit very real. The "stay" vote continues to lead the "leave" vote by about 10 points in the polls, but there are many undecided voters, and Johnson, who is a strong campaigner, will undoubtedly shift the odds a bit. Expect Cameron and the U.K. financial industry to fight hard against a leave vote by telling doomsday stories about an economic meltdown, much like they did in the Scottish referendum in 2014. Those tactics can be effective, but Euroskepticism might be an even more powerful force in British politics than the drive for Scottish independence is in Scotland.

If the United Kingdom left the European Union, its trade position would change dramatically. It would need to negotiate bilateral deals quickly with all of its former EU partners. It would need to set an entirely new immigration policy. It would have to fight hard to preserve the City of London's special position as a financial center. The island nation would also find itself in competition with Europe in a way that hasn't been true since the 1970s.

On the tax side, the changes might be much less dramatic. Breaking with Europe would free the United Kingdom from the VAT requirement and would allow it to disregard state aid rules. It would also allow the U.K. to ignore the merger directive and the parent-subsidiary directive, neither of which is particularly important given the U.K. treaty network's protections against double taxation. If Cameron stays in power after a Brexit, it's unlikely that he would move to change the U.K. tax system. He can't afford to scrap the VAT, and the Conservatives aren't overtly in favor of state aid (although there are many subtle ways to give state aid that right-of-center parties have supported in the past).

If Labour were somehow governing, however, things might be very different. Although Labour leaders are campaigning to stay in the union, their party would almost certainly revisit state aid policies in the event of an exit. Labour might push for renationalization and be more inclined to push for higher taxes on EU subsidiaries and multinationals, something that the CJEU frequently thwarts through its extremely antitax jurisprudence.

It's hard to know exactly what a post-exit United Kingdom would look like because neither political party has spelled out what leaving the EU would mean. But there would probably be much more continuity on the tax side than in other important financial areas -- that is, unless the Conservative government fell as a result of the referendum and Labour took its place.


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