We were never going to have a great British bonfire of the tax system after Brexit
We can celebrate a new excise duty for beer sales, but the rest of our tax regime – like VAT for tourists – will be kept in place, writes Tim Sarson.
During what should be the height of summer, I believe we may have seen the arrival of an elusive creature. No, not extended periods of sunshine or even a heatwave, but something else – a Brexit tax benefit in the form of a new excise duty regime for on-trade beer sales, known as the ‘Brexit Pub Guarantee’.
So yes, this is a Brexit column.
One feature of being a member of the EU is that certain aspects of tax policy are governed by community law. For VAT and customs duty, the legislation and some administration is standardised across the Union. For other taxes the fundamental freedoms of capital, establishment and people impose limits on what Member States can do in their own systems.
Brexit opened up opportunities for what we refer to as divergence. That means allowing UK rules to drift apart from EU rules. In theory it allows us to design a tax system more appropriate to our own economic and social priorities rather than the entire EU bloc.
So far we have seen very little.
Look for example at that most EU of taxes, VAT. The entire system is designed, litigated and partly administered at EU level. The UK could now overhaul VAT entirely if it wanted to. So far we have seen a handful of micro-divergences: zero VAT on women’s sanitary products and on energy saving home improvements, though not the anticipated VAT cut on domestic fuel. We neglected to reintroduce VAT-free shopping for foreign tourists, doubtless to squeals of delight from shopkeepers in Milan or Paris.
We may see divergence in the interpretation of the rules now the UK is no longer bound by CJEU rulings. Given that many of these historically went against the Government, it’s possible HMRC are more enthusiastic about this than taxpayers.
But wholesale divergence is very unlikely because it creates massive friction to cross-border trade. Like Judith Kerr’s Mog, multinationals generally “don’t like things to be exciting, they like them to be the same”. It’s a common story across most taxes and regulations: post-Brexit divergence means more red tape.
Customs duties are taxes of sorts, but these inhabit a space far away from the rest and belong more in trade than fiscal policy. They aren’t conceived as revenue raising measures but rather as protecting domestic producers or facilitating international trade.
Even in trade policy we have limited freedom of movement. Take the new Carbon Border Adjustment Mechanism (CBAM) for emissions-intensive imports into the EU. We could choose to ignore it, but that would put at risk our ability to export to the bloc. The UK is already consulting on an equivalent regime.
There’s been more obvious action in Corporation Tax. This is an area where the commission is very busy so there are ample opportunities for divergence by simply standing still. Since Brexit we already declined to adopt in full the “DAC6” rules, which mandate disclosure of a range of tax planning arrangements involving EU entities; we didn’t copy the so-called “Unshell Directive” on shell companies, and we’re not (yet) adopting Public Country by Country Reporting. Some tax justice campaigners may be upset by this. A few taxpayers will be relieved. Most will be nonplussed: if they operate in the EU they have to comply with the rules anyway.
There is some scope to diverge on state aid. The EU regulates and litigates against member states that adopt tax policies favouring specific industries or home-grown investment. Outside the EU we have more leeway to pursue a domestic industrial strategy, within limits set by our international trade agreements including the Brexit Deal itself (aka the Trade and Cooperation Agreement). We’re starting to see some movement. From next year our R&D credit regime will no longer incentivise most activities taking place outside the UK. Before Brexit that would have been unlawful. But guess what, prompted by the Americans’ fiscal splurge in the Inflation Reduction Act, the EU has decided to water down its own state aid rules. Nothing is ever fixed; we’re always diverging against a moving target.
The upshot: if you’re eagerly awaiting the post-Brexit bonfire, tax policy probably isn’t the first place to look.