We don’t need to leave the EU to reform tax – we can start now

In the run-up to the referendum, tax wasn’t a fundamental part of the Brexit debate in the way that immigration, international trade and EU funding were. Later in the campaign, the ‘take back control’ message included taking back control of our taxes. However, very little explanation was given as to exactly what that would mean.

With the exception of VAT, an EU tax, the majority of our domestic tax law is and always had been a national competency. The EU imposes certain boundaries, primarily intended to protect competitiveness. However, each year’s Budget brings approximately 600 pages of new tax law; this is a good indication of the UK’s ability to legislate on tax.

However, there are tax issues to be considered. Depending on what Brexit looks like, and the unfolding economic impact, the government may look to use tax as a tool to mitigate negative impacts and enhance positive ones.

One challenge may come from the UK exiting favourable EU directives. The Parent Subsidiary Directive and the Interest and Royalties Directive provide relief from withholding taxes on dividends, interest and royalty payments made between companies in different EU states. If those directives no longer apply, double taxation could arise for groups with a UK parent and EU subsidiaries or vice versa. There could be withholding taxes on payments of interest and royalties between the EU and the UK, and the UK’s network of double taxation treaties may not alleviate all of these.

An opportunity may arise if the final negotiated position means the UK is no longer subject to the EU State Aid rules, as the UK would then be able to introduce targeted incentives for particular sectors or regions, currently outlawed as State Aid. This is most likely in a ‘hard Brexit’ scenario. Any negotiations to create a special regime for the UK, such as access to the Single Market, will almost certainly see some form of State Aid rules by the EU. Whether the UK accepts these conditions will depend on how the negotiations develop. Indeed, even a ‘hard Brexit’ might leave the UK subject to the WTO Agreement on Subsidies and Countervailing Measures, which although different from state aid, would also put some boundaries on what the UK could do in terms of business incentives.

What is clear is that the government is unlikely to relent in its efforts to tackle tax evasion and avoidance. Although the EU has been active in challenging large multinationals over their tax affairs, the UK is committed to these issues through the OECD and the G20. Brexit doesn’t change that. The UK may not be obliged to adopt the proposed EU Anti Tax Avoidance Directive, but this is fundamentally about implementing the OECD BEPS proposals, which the UK has already committed to do. The UK will continue to be influenced by the same international pressures to tackle tax avoidance.

Brexit is likely to bring calls for dramatic and fundamental reforms of our tax code. However, there is a lot that could be done to reform UK tax without leaving the EU. By contrast, some of the changes being discussed may not be achievable even in a UK that has ‘taken back control.’

Tim Law

Tim Law

Tim is a tax professional and Director of Engaged Consulting. He is very passionate about modern businesses addressing tax issues in a manner fit for the 21st century.
Tim Law

@TimLawTax

Tax advisor https://t.co/Zs4dTbxXP3 blogger, writer. Expert in tax transparency and strategy. Passionate about tax communications. Voted 5 in 2016 #economia50.
RT @hselftax: Time to start the ball rolling on US tax reform. Do you think we'll get: - 2 days ago
Tim Law
Tim Law

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