This paper will reflect and discuss the implications of the Brexit on UK tax policy. It is important to note that this paper was written before the 31st of October 2019, which it is supposed to be the day the United Kingdom is leaving the European Union and therefore does not reflect any modifications after this date. Therefore, without knowing if the UK will leave the EU soon, I must remove any uncertainty about the implications and modifications on the UK tax policy and thus only discuss the effects as the date this paper was written. Moreover, this paper will focus only on the indirect tax and considering the UK is leaving the EU. The reason of focusing on this scenario is that the Brexit implications on the UK tax policy are complex and the other scenario needs further and deeper analysis and thus I shall focus on the tax that will create the biggest repercussions on the UK tax system without considering a no-deal Brexit.
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Overview of the Brexit and UK Tax Policy
Before discussing the implications of Brexit on the UK tax policy, some explanation about the stakes of the government from their decision to adopt a Brexit scenario and what that implies for the UK tax policy are needed. These stakes are to cease membership of the single market as well as the membership of the EU customs unions and bringing an end to the jurisdiction of CJEU (Court of Justice of the European Union). Since the government trigger the Article 50 of the Consolidated Treaty on European Union, which states, ‘The EU becomes obliged to negotiate and conclude an agreement with the UK “setting out the arrangements for its withdrawal, taking account of the framework for its future relationship” (Practical Law Tax, 2019:2)’. Thus, if the deal passes through, they are going to be a transition period which EU laws will still apply to the UK until the end of the period on 31 December 2020 (Cape and Schofield, 2018:290). After that period, the new UK tax policy and system will be effective, thus during the transition period, the UK government has to determine the new tax policy and how these modifications will impact the UK economy. The following discussion implies that there is a possibility that the UK taxation will diverge from the current one. One of these divergences from the current position will be the indirect tax: VAT, customs duties and excise tax. As of today, the indirect taxes are EU taxes and thus the UK would need to introduce its own customs duty systems or the UK can remain in the Customs Unions with the EEA and EU states with these possible alternatives memberships: (1) Membership of the EEA (2) Negotiated bilateral agreement (3) Advanced Free Trade Agreement, and (4) WTO membership (Deloitte, 2016). Regarding the VAT, which is already in the UK tax system, will continue without the VAT Directive, but will be subject to some modifications that will impact the UK economy (ICAEW, 2019). Moreover, the consideration of developing a new tax system can be probable but will be ignored in this paper as well as a no-deal scenario since the implications of the Brexit on the UK tax policy is different than with an agreement (Deloitte, 2016). Also, a no-deal scenario can be disastrous to the entire economy and therefore need more proper analysis (GOV.UK, 2019). In brief, this paper will discuss the current UK indirect tax and what Brexit will implicate to the new UK tax policy.
This paper will focus on the indirect tax, which is as tax on what you spend. A proper definition according to A Dictionary of Business and Management by Jonathan Law of indirect tax is: ‘charges levied by the State on consumption, expenditures, privilege, or right but not on income or property’ (2016). The firm KPMG includes VAT, customs and excise duties as well as insurance premium taxes and environmental taxes in the indirect tax group (n.d.). This tax is important since the UK relies a lot on it as a source of revenue and that is the main reason this paper focus on it. According to a survey of the UK tax system by the Institute for Fiscal Studies, the government revenue raised by the UK taxes are forecast to be ‘£716.5 billion in 2016–17, or 36.9% of UK GDP (2016: 5)’. Also, VAT itself should bring 16.8% of total receipts for the government, which is estimated as £120.1 billion in 2016-17 (Pope and Waters, 2016). Hence, the implications of Brexit on the indirect tax will be discussed in three distinct subclasses: (1) VAT (2) Customs duties, and (3) Excise tax.
VAT (Value Added Tax)
According to the UK government, under current VAT rules, the VAT is charged on most goods and services sold within the UK and the EU. It is payable by businesses during the importation of goods into the UK—there are different rules depending on the original destinations. For the exportation of goods to non-EU countries or EU businesses, the zero-rated rule applies whereas the EU consumers have to pay an UK or EU VAT depending on the place of supply principle for the amount charged (GOV.UK, 2019). The VAT adds 20% to the cost of all goods and services except food and children’s clothing. From the exit date, the EU VAT law (on rates of VAT, exemptions, zero-rating) will cease to apply and how the VAT will be charged is still in discussion. Some constraints will be terminated such as what can be zero rated and the rate at which VAT is charged but will be constrained by the UK VAT legislation in place if there are no effective modifications (Mazars, 2016). However, after the UK leaving the EU VAT area, ‘intra-community supplies of goods and services are likely to be treated as import and exports between the UK and other EU Member States (PwC, 2018: Paragraph 1)’. That means that UK importer will have to pay import VAT at the place of supply from the EU whereas the importers may have to declare their imports. Therefore, without any trade negotiation, the cost of exporting to the EU States will be higher because of the customs duties and import VAT and thus reducing the attractiveness of UK exports (Mazars, 2016). Another factor that the UK will have to consider is the double taxation arising from the place of supply rules and the definitions of a place of business. This will occur if the UK does not define differently the place of business for VAT purposes or the UK does not apply the reverse-charge rules with the EU members (PwC, 2018). The change in intra-EU transactions will impact reporting and cash flow for business and even the government. For example, certain sectors will need to change how they account for VAT such as the travel sector who ‘may no longer be required to account for VAT under the Tour Operators Margin Scheme’, which will impact the tourism sector since how the VAT will be applied will create an additional cost to the Exchequer or the travel industry (Deloitte, 2016:3). Another example of the additional cost to business related to the change in the VAT system is the Mini One-Stop Shop (MOSS) who:
excuses taxable persons supplying services in more than one EU country from having to register in other member states. Currently UK firms can rely on their UK registration, but after Brexit UK traders would have to register in an EU member state to take advantage of this scheme and non-UK traders that have registered in the UK for this purpose will need to re-register elsewhere (Freedman, 2017: 85).
Thus, UK businesses who sell telecommunication, broadcasting or electronic services to consumers or business in other EU member States will have to register for VAT in each State or register, ‘under a non-Union MOSS facility administered by another member state (Salmond, 2017:47)’. Furthermore, since the VAT become more popular and the UK depends heavily from this tax for revenue, any changes to the UK’s VAT system will create changes in businesses’ tax, accounting procedures, which can be time consuming, a burden, and create administrative costs (Deloitte, 2016). Another complication that the Majesty’s Revenue and Customs (HMRC) will need to review, according to a recent CJEU case law (Case C-7/13), is that different EU member treated VAT groups differently, which will add more competition and complexity between member states but also for the HMRC’s way of accounting the VAT (Salmond, 2017).
According to the U.S. Customs and Border Protection (2017), Customs Duty is:
a tariff or tax imposed on goods when transported across international borders. The purpose of Customs Duty is to protect each country’s economy, residents, jobs, environment, etc., by controlling the flow of goods, especially restrictive and prohibited goods, into and out of the country.
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Therefore, the implications of the customs duties are really important for a country and should be taken into consideration if the UK leaves the EU customs duties systems. For now, the UK does not control the level of customs duties at its border, but this can be changed after the Brexit. The UK has to pay the European commission the duty collected from the imports, which is around 75% of the imports (Freedman, 2017). Following secession, the UK will then receive all the revenue generated from the Customs Duty but will have to pay for the border controls costs. Also, the UK will need to negotiate a border control with the EU since it is going to leave the EU Customs Union. On the other hand, the EU has implemented a European Free Trade Area where the imports and exports within the trade area is free of duty. The EU also has free trade agreement with other countries (around 70), but for the rest of the world where there is no agreement, there are customs duties charged on import on more than 16,000 different kinds of goods (Hannam, 2017). Thus, the new legislation the UK is going to adopt will impact the whole supply chain for goods since the UK will have no more access to these trade agreements and their advantages. Until the UK reviews its customs duty system and trade agreements, the duty will be payable when the goods are moving to and from EU Member States which will add extra compliance costs (Deloitte, 2016). For instance, the EU requires various car components to be moved back and forth between EU member states and without any agreement with the UK and the EU about the manufacturing industry, the cost of being in the manufacturing sector in the UK will increase significantly (Salmond, 2017). Also, the new legislation that the UK will have to implement about customs duties will affect the duty rates, the conditions for operating duty reliefs and general customs procedures, which can create greater complexities for trading with UK businesses (PwC, 2018). Moreover, the introduction of new customs controls will create add some time and cost implications for the EU States when trading with the UK businesses (PwC, 2018). It is also important to note that some Customs and International trade programmes are likely to continue such as the Authorised Economic Operator programme or the UK’s rights and obligations as a member of the World Trade Organisation (Deloitte, 2016). Therefore, the UK will continue to benefit from some of the agreements already in favor or by negotiated new free trade agreements but would lose some by being withdrawn from the EU trade agreements. The time frame of negotiated new or previous agreements will take time and can impact the UK economy since no free trade agreements will be in place between some countries.
Excise duties are taxed on things produced or sold in the UK such as drink, tobacco and petrol. The excise tax is a good source of revenue for the UK government and a larger part than the customs duties (Hannam, 2017). According to a survey of the UK tax system by the Institute for Fiscal Studies, the tobacco, alcohol and fuel duties will be 6.7% of the government income in the fiscal year 2016-17, which amount for £47.8 billion (2016). An important point when discussing about the excise tax is how it is treated. The excise tax includes a VAT amount on top of the tax. To be more precise, the duty is ‘treated as value added to the product for VAT purposes. Effectively, you pay tax on tax (Hannam, 2017:39).’ As of pre-Brexit, the goods included in the excise group can move between the UK and the EU member states with a zero-excise duty. Therefore, the excise tax policy can be affected during the EU-UK negotiation post-Brexit. The uncertainty about what will happen to the excise duty rate and the movements of these goods before the negotiation does not allow to establish exactly what will be the impact of these changes. This excise tax will depend on the trade agreements that the UK will undertake after the Brexit (Chartered Institute of Taxation, 2019). In a withdrawal agreement scenario, the UK will be treated as if it is a Member State of the EU during the transition period and thus will continue to follow the EU’s excise rules. After the transition period, the movement of excise goods from the UK to the EU will ‘have to be released from customs formalities before a movement under Excise Movement and Control System (EMCS) can begin (Taxation and Customs Union, n.d.)’. Although there is no further information before the negotiation about what will happen to the excise tax, we can know that the movements of excise goods between the UK and EU member States will be treated as imports and exports. Thus, without further arrangement between these two, the movement of the excise goods will follow different procedures than the intra-EU trading rules and therefore create compliance costs for these two parties (Deloitte, 2016). By knowing this information, we can assume that a trade agreement between these two will be beneficial regarding the movement of excise goods between the UK and the EU member states. Additionally, an important and polemic factor to consider is the excise rules in Northern Ireland (backstop). The article 9 of the withdrawal agreement ‘provides that certain EU VAT and excise rules will continue to apply in Northern Ireland with respect to movement of cross-border trade in goods (Chartered Institute of Taxation, 2019)’. However, this factor is still in discussion between the member of parliaments and without any further information, the implication of this article into the UK tax policy and economy is still uncertain.
The implications of Brexit on the UK tax policy will have a huge impact on the UK economy and will create repercussions worldwide. This main paper focus on the indirect tax effects after the Post-Brexit if the UK government reach a deal with the third parties concerned. The UK VAT system will be affected by ceasing to respect the EU VAT rules and thus will create implications in how the UK will charge VAT in the different tax group. By ceasing membership of the single market and the EU customs unions and also bringing an end to the jurisdiction of CJEU, the UK will need to reach new trade agreements with EU member states or other members affiliated to these previous agreements to compensate some of the negative implications mentioned above. Another consideration of leaving the EU is the UK will need to review and adjust is custom borders as well as how to perceive and define the movement of goods between their borders and other countries. How the UK will approach this issue will have repercussions on the UK tax policy and their economy. Additionally, a Brexit deal will create other tax implications on the UK tax system than on the indirect tax. For example, the direct tax—which is taxes on your income and earnings such as income tax, national insurance, etc. will be impacted by the new tax policy. Also, the taxes on what you own such as capital gains tax, taxes on homes, property, pensions, saving as well as taxes on business, financial transactions and international tax will be impacted (Hannam, 2017). Additionally, a no-deal scenario of the Brexit, which can be disastrous to the UK and the world economy, can also have implications on the UK tax policy (GOV.UK, 2019). For instance, the Organisation for Economic Co-operation and Development (OECD) projects that a no-deal Brexit will ‘slice almost 3% from the UK economic growth over the next three years compared with just 0.6% from the rest of the EU’ since the UK will lose trade, investment and technical knowledge as well as a depreciated pound (Inman, 2019). With that kind of effect into the economy, even if the no-deal scenario as well as the other tax impacted by the Brexit is not discussed in this paper, it should be taken into consideration when talking about the implications of the Brexit on the UK tax policy.
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