Brexit & VAT: Breaking up is hard to do

Brexit: Three ways to divorce the EU
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What is likely to happen to the UK trading and taxation environment when the Prime Minister triggers article 50 to start negotiations around the UK’s exit from the European Union?

Few people are brave enough to tackle that question with so much yet to be resolved, but Avalara’s vice president for indirect tax Richard Asquith is made of sterner stuff.

As a contributor to the company’s VATlive.com blog, he has been monitoring developments since 23 June and mapping out the tax milestones on the road to Brexit and beyond. At Avalara’s indirect tax conference in London on Tuesday, Asquith sketched out a range of Brexit scenarios that he described as “three ways to divorce”.

Before the detailed untangling of UK tax and business regulation from EU laws can start, three things have to happen, he explained:

  1. Article 50 must be invoked to trigger the two-year clock on negotiations with EU partners for exit. Article 50 is revocable, Asquith added, and can be extended if all 27 of the other countries agree
  2. Then negotiations can start on the trading arrangements with EU post-Brexit and to clarify what will happen around VAT, direct taxes, labour, environmental laws, agriculture and security
  3. Once we’ve gone through that process, then we can talk to rest of world. “And not before that, because people in group two won’t talk to us until they know what goes on in stage two,” said Asquith. “That’s why people say this is a 10-year process”

EU divorce options

The first option for leaving our European lovers will be the “hard exit” favoured by Brexiteers. Asquith described this stance as, “We clearly dislike each other, let’s just part.” That would mean negotiating 167 WTO [World Trade Organisation] agreements. He warned that there are some significant risks if the UK revokes the 1973 European Communities Act and sets tariffs at 0% for all EU countries and waiting for them to reciprocate.

“The EU can’t do that,” he said. “Potentially that could mean 10% tariffs on all the cars that come out of Sunderland. That’s a reason why we can’t risk it. Most other countries around the wold would have to do the same under WTO. We haven’t negotiated our list of concessions, which is a starting point for negotiations. This is probably a crazy thing to do.”

The second option is to go for a similar stance to Norway, where the UK is outside the EU, but part of the European Free Trade Association. Or as Asquith put it, “Let’s stay together for the sake of the kids. Clearly we don’t like each other, but we have to co-operate on some level.”

Norway currently contributes to EU coffers at a rate that is roughly 80% of its GDP to the UK’s current contribution level. In return it has membership of the single market, but has no say in setting the laws. This means that Norwegians have to accept what they call “fax legislation” from Europe. “All that is irreconcilable to our vote on 23 June,” Asquith commented.

The third option would be the amicable separation model. “You have the CDs. I’ll have the dog. We’ll agree about some things, but on some we can’t so let’s just live with it,” said Asquith. “That’s what the Swiss have. Good ties, but not a fully operating single market.” The Swiss model is a popular reference point for Brexit scenarios, but Asquith pointed out they have rejected free movement of people.

The Avalara vice president's money is riding on a variation of the hard break similar to Canada’s buccaneering free-trade model - but with a more considered approach to negotiating trade agreements with Europe and WTO countries.

As an indirect tax specialist, Asquith sees Europe’s Customs Union as a key issue. The Customs Union currently includes 30 countries - including Turkey - whose goods are not held up and inspected at borders because they’re part of the agreed regulatory framework. “If we stay in and we’re outside EU, we abrogate all our rights to negotiate with the rest of the world. Turkey is fuming about this,” Asquith pointed out. “The EU is negotiating with the US over TTIP [the transatlantic trade and investment partnership]. Turkey does not have a say in the terms the EU is negotiating on its behalf. We couldn’t countenance that kind of arrangement.”

Unlike other agreements, the Customs Union rules are directly set in Brussels. “It’s not like VAT where we can take our pick and give derogations. All we do is collect the money on goods imported into EU. In return we get to collect 25%,” he said.

The cost of running a UK customs regime is estimated to be between €2-€4bn and Asquith estimated being outside the union could restrict 2% of the UK’s exports to the EU - taking the estimated impact up to as much as €6bn.

On the other side of the equation, the UK contributes €8-€12bn to the EU budget. That entitles the UK to have a say in how the single market works. It gives the UK a right of veto at the European Council, a right to block direct taxes, and to have a say on indirect taxes.

Those points are the crux of what happened on 23 June, but membership of the single market means you have to accept the free movement of people, Asquith argued. “If goods could move freely and labour couldn’t, companies would set up in the countries with the lowest cost of labour and export to markets with the highest prices. That would exploit the wage negotiating power of people in poor countries and have serious side effects socially,” he said.

“It also works the other way. Companies in a free market need resources where they want to produce their goods. You can’t have single market without the free movement of labour.”

*This article was amended 16 September to change the term 'boarder' to 'border'

About John Stokdyk

John Stokdyk, AccountingWEB head of insight

AccountingWEB’s Head of Insight has been with the site since 1999 and likes to spend his time studying accountants’ technology habits. When not nerding out, you can find him exploring obscure indie music and searching for the perfect organic sourdough loaf from his base in Brighton, UK.

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16th Sep 2016 11:52

Just a spelling correction. "Boarders" are people who pay for accommodation in someone else's home or at a school, whereas "Borders" are boundaries that separate nations.

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to andyiddon
16th Sep 2016 12:14

Thanks andyiddon, the 'boarders' snafu has been amended now.

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avatar
16th Sep 2016 12:56

Quotation as follows from the article: "Those points are the crux of what happened on 23 June, but membership of the single market means you have to accept the free movement of people, Asquith argued. “If goods could move freely and labour couldn’t, companies would set up in the countries with the lowest cost of labour and export to markets with the highest prices. That would exploit the wage negotiating power of people in poor countries and have serious side effects socially,” he said. “It also works the other way. Companies in a free market need resources where they want to produce their goods. You can’t have single market without the free movement of labour.”"

This neatly summarises the need for free movement of labour being a requirement for a free trade area, which was the laudable goal set at the outset of the Common Market, never mind the EU. However, within the quotation there is also a clue as to why it has all horribly gone wrong and lead to Brexit. Where economies broadly have the same living standards as seen in Germany, France, The Netherlands and the UK, plus several other countries, free movement of labour is highly desirable. The problem is that many poorer nations joined the EU club and this caused much more than 'free' movement - a mass exodus to the wealthier nations would be nearer the mark.

Free movement of labour is a laudable principle. All we need is a mechanism for putting the brakes on movement from the poorer countries until their economies begin to bridge the divide.

The poor countries will never bridge this divide without inward investment grants funded by the EU, without the funds being classified as loans that need to be repaid. If there is no political will to generate a relatively level playing field across all of the economies of the EU, then the rich will continue to get richer and the poor will continue to be hamstrung by debts that they will never be able to repay.

Eventually the current EU model will fail unless politicians grasp the need for fundamental reform. The problems with mass free movement of labour are a symptom of the disease afflicting the EU and not the cause of the problem. Having a goal of balanced economies is the missing link, but the political will to fund the costs of achieving it is absent. Just ask the Germans how much it cost to integrate East Germany, where there was the political will to do it.

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16th Sep 2016 13:42

Bring back EFTA (European Free Trade Association)

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