Some brief thoughts on Brexit and tax

It is a fallacy to believe that the UK can completely extricate itself from the EU. The reason is simple. So long as the EU exists, the UK will have to engage with it if it is to actually trade with the bloc. But with the UK no longer at the table adding input in respect of the rules which govern that trade, the EU is granted a significant increase in relative power. And that is the crux of the issue in respect of tax post-Brexit. The UK will still be subject to the vast bulk of EU hard and soft-laws. However, it will no longer have influence on the scope and substance of the hard rules, and the soft rules will no longer have such a soft edge. Inspired by a fantastic seminar organised by 39 Essex Chambers this morning, the purpose of this post is to outline some brief thoughts on the impact of Brexit on tax.

It is first worth setting out what hard tax rules the UK is subject to by reason of its membership of the EU (on which, see this excellent, comprehensive paper from the UK Government in 2013). As set out in Articles 110-113 TFEU, the EU has competence in respect of indirect taxes, which most importantly includes VAT. Direct taxes meanwhile are within the competence of the Member States, provided that they do not fall foul of Union Law, most prominently, in respect of the principle of non-discrimination (non-nationals and non-resident EU companies have to be treated in the host Member State in the same manner as nationals and companies of that state) or state aid. Unanimity between the Member States is required to bring to life a Direct Tax measure of which there are a few, most notably, the Parent Subsidiary Directive, the Interest & Royalties Directive and the Merger Directive.

That these are all rules that the UK subscribes to as a result of EU Membership does not flow as its converse that the UK would no longer be subject to them if it were not a member of the EU. The level of access that the UK wishes to acquire to the single market will have as its consequence that it must subscribe to a proportionate quantity of the rules. Would that include provisions, for instance, on state aid? Timothy Lyons QC this morning pointed out that “Trade Deals” with the EU are a misleading title for what are in reality “Political Deals”. When Switzerland arranged a trade deal with the EU, it was obliged to also subscribe to rules on “Public Aid” which in reality were equivalent to the EU rules on state aid. Elsewhere, few would seriously contend that the UK would even attempt to scrap VAT given that it accounts for a significant proportion of the UK’s total tax take.

The crucial point in respect of hard EU laws is that the UK would have to subscribe to them to a varying degree depending on the level of access that to the single market it wishes to acquire.

That takes us to soft-laws. It is well recognised that the EU seeks to exercise soft power additionally in respect of tax matters (see here for a nice synopsis of EU tax policy over the last 5 years by FairSkat). Soft-laws however become much more rigid when the Commission can additionally put some weight behind them by restricting access to the single market. Of course, that sanction cannot arise for Member States of the EU, but importantly it is an issue for third countries. In this respect, the “sovereignty” of the UK to determine its own tax policy is in fact more restricted by being outside the EU. To give an example, were the UK to lower its corporate tax rate to say 10%, the EU could retaliate by limiting access to the single market.

In summary, Brexit has the threefold effect i) of still subjecting the UK to EU hard laws, ii) but without any say on the scope or substance of these rules, and iii) to soft-laws which have now become more solid.


About taxatlincolnox

Tax law academic. With this blog, I seek merely to contribute to the debate. All thoughts are mine, of course.
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