AccountingWEB takes a look at the short, medium and longer-term tax implications of the UK’s break with the European Union.
Following the Leave victory on Friday morning (24 June) and the Prime Minister’s subsequent decision to leave office in October, the government is likely to be in disarray for the next 3-4 months. Politicians and civil servants are trying to regain control of a chaotic situation with no visible long-term plan in place.
A large number of major policy consultations were put on ice during the referendum campaign. With attention diverted to more immediate concerns many of these policy documents may not be released.
The biggest question mark for accountants hangs over the long-awaited Making Tax Digital consultations - which those in the know were expecting to emerge in the immediate aftermath of a remain vote. But with so much else to contend with in Whitehall, the initiative could well be put on hold until a new Cabinet is in place.
The 2016 Finance Bill is already running behind schedule. And with a Conservative leadership election on the offing, it is entirely possible the Finance Act may not get passed as planned in early October.
“If Osborne clings on as Chancellor there is likely to be an emergency Budget sooner rather than later,” predicted AccountingWEB tax editor Rebecca Cave.
“When Cameron goes, Osborne is likely to go as well – so there will be new Chancellor,” she added. “A new Chancellor will have a new vision of what needs to be done - which equals a Budget.”
However George Bull of RSM said early indications are that there will not be an emergency Budget so soon after the referendum.
He added that the referendum has already held up 40 pieces of tax legislation which will now be reactivated.
“Most of these will come into force between late 2016 and April 2017,” Bull said.
During the referendum campaign, the Chancellor collaborated on an illustrative Budget with former chancellor Alastair Darling that anticipated £15bn of tax rises and £15bn spending cuts.
If the emergency Budget follows this path, it will most likely crack the triple tax lock with rises in income tax and national insurance. The measures outlined in the Remain campaign Budget included a 2p rise in the basic rate of income tax, a 3p rise in the higher rate, and a 5% inheritance tax rate to 45p.
To keep companies in the UK who are tempted to leave, the rate of corporation tax will probably not be increased.
Looking to the medium-term, the changes we might see in the tax system revolve around the formal date of exit from the EU.
George Bull said in the period prior to exit, two key principles guide the application of taxes within the UK:
“First, direct taxes. These are imposed by UK law but must be operated in accordance with EU law. Second, VAT. This is both imposed and operated in accordance with EU law. For direct taxes particularly, within these broad constraints the rates of tax and structure of the tax system will be set in accordance with the requirements of the tax raising powers of the parliaments in Westminster, Holyrood and Stormont,” he said.
Long term - the future of VAT
The process of divorce from the EU (under article 50) is likely to start in late 2016 and continue to late 2018, or possibly longer.
In the short to medium term, tax and regulations tied to European law - VAT, for example - won’t change.
Changes on VAT on domestic fuel were promised by the Leave side, but are unlikely to happen as VAT has been proven to be the most efficient taxes around the world and collects £115bn a year for the UK government.
Ultimately the VAT rate could even go up as it is relatively easy to implement the change.
ICAS director of taxation Charlotte Barbour told AccountingWEB: “One of the key European taxes is VAT and this collects an enormous amount of revenue. It is difficult to see how this could be radically changed in the short term. In the longer term, of course, there will be no need for referrals to the European Court on VAT matters so in time this tax is likely to become a more distinct and bespoke tax in the UK.”
VAT specialist Rhona Graham said the first casualty may be a proposed change in VAT rate from 1 August 2016 on installation of solar panels and other energy-saving things. A CJEU ruling had required that UK put up the VAT rate from 5% to 20% on such supplies, but this change is not in Finance Bill 2016, so may not now happen.
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About Robert Lovell
Business and finance journalist