Early indications are that there will not be an emergency Budget so soon after the referendum. However the referendum has already held up around 40-odd pieces of tax legislation which will now be reactivated. Most of these will come into force between late 2016 and April 2017.
In parallel, the reshaping of our relationships with the EU will determine the future direction of the UK tax system.
Clearly the UK Government must collect taxes to keep the country running, to deliver necessary services and to pay interest on the nation’s debt. While figures published by HMRC on 21 June 2016 show that total HMRC receipts as a percentage of GDP have oscillated from 30.4 per cent in 2007/08 to 28.4 per cent in 2015/16, there are now no easy candidates for reducing public expenditure. So the level of tax-funded expenditure is likely to continue at the same level for some time yet. To put it another way, if GDP continues to run at the same level then we can also expect taxes to continue at around the same level. However, if the economy grows significantly, or shrinks markedly, then the Government of the day may have scope to reduce tax as a percentage of GDP, or might have no choice but to increase it. In other words, while the whole issue is hedged around with numerous imponderables, if the economy changes then so will the tax burden faced by individuals and companies.
Looking ahead to the immediate and the medium-term, the changes we might see in the UK tax system revolve around the formal date of exit from the EU.
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.
In the past, the UK has had a number of disagreements with the EU over the scope and operation of UK taxes. These include:
- patent box;
- changes to the taxation of controlled foreign companies;
- differential rates of insurance premium tax; and
- capital duty.
After the UK has ceased to be a member of the EU, both the tax rates and the structure of the tax system will be determined according to the needs of the parliaments in Westminster, Holyrood and Stormont, subject to the terms of the UK’s settlement with Europe. On the direct tax front, a number of changes are likely:
- transfer pricing – for many groups of companies, the number-one direct tax annoyance is UK-to-UK transfer pricing, caused by the requirement for the UK tax system to be EU-compliant. If the Government wished to do so, it could abolish these rules so that transfer pricing only applied to transactions between UK companies and those overseas.
- EU State Aid rules – subject to the terms of the exit settlement between the UK and the EU, these would no longer prevent the UK Government from giving selective advantages to companies via advance tax rulings.
- incompatibilities between UK tax law and the EU – these will cease to be a problem on exit. Quite what would happen to the disputes, potentially involving billions of pounds, currently before the courts is open to question.
- UK tax reliefs, allowances and benefits – once the UK has ceased to be a member of the EU, it will not be necessary to extend these to both EU citizens and corporations. These could once again be restricted to UK citizens/residents and companies.
Following the UK’s exit from the EU, VAT might be expected to continue in the UK in much the same way although it will be necessary for tax law to be changed to confirm that relief for import VAT will continue to be available. There may also be issues with output VAT which could harm UK exporters unless a mechanism is developed to allow EU importers to reclaim import tax in much the same way as they do now.
After exit, the interpretation of VAT law in the UK would not be bound by the European Court of Justice. Even if UK VAT law does not change, there could well be changes in the way HMRC applies VAT in the UK. Specifically, the taxation of cross-border transactions may change. Although the EU is developing plans to extend the 'One-Stop-Shop' mechanism to non-EU suppliers of online sales of goods, it is likely that many UK traders will, nevertheless, have to register for VAT in each country in which they trade.
Once the UK has left the EU, some EU tax developments will proceed without UK influence. This includes the EU Financial Transactions Tax as well as the Common Consolidated Corporate Tax Base. The UK has hitherto opposed both of these. Any loss of influence might harm the interests of UK businesses active in Europe.
The next few years promise to be very challenging for individuals, businesses and tax practitioners alike.