As 23rd June approaches there is a strong and increasing focus on the economic and fiscal implications of a vote in favour of leaving the EU.
According to the Institute of Fiscal Studies (IFS), should Britain vote to leave the EU on 23 June, an estimated £18bn of spending cuts and tax rises could be implemented with working people being among the worst affected by deeper cuts to public services, tax rises and social security cuts.
Departmental resource budgets would fall by 2.8% in 2019-20 on top of existing plans. The Department of Health and the Department for Education could be cut by £3.5bn and by £1.6bn respectively, while the Home Office and the Ministry of Defence could see their budgets slashed by £300m and £800m.
It is the opinion of many that following an ‘exit’ vote the UK government would almost certainly need to have an “emergency” budget. Clarification on tax and spending ‘post Brexit’ would be essential.
Of course, all taxes would need to be considered carefully in light of the overall economic position – which would need to be substantially estimated as certainty would be highly unlikely – at least in the short term. One would expect predictions to be more biased to pessimism with the resulting downward impact on spending and upward impact on taxation. In particular the UK’s proposed changes to the corporate tax regime would be influenced by the eventual trading relationship negotiated with EU countries and other trading partner nations. This, though, would not be clarified for some time.
In the new ‘post Brexit ‘ world, the UK government would, however, have complete sovereignty over the tax system. As a result it could, if it wanted, make sweeping changes to the corporate tax system, provided existing bilateral double tax treaties are respected, including offering additional incentives without having to seek EU state aid clearance.
It would also be able to simplify some regimes for UK companies by exempting transactions entirely between UK companies from the scope of transfer pricing and similar rules. The Treasury might also be tempted to introduce a law abolishing historic EU-law based tax refund claims, saving the exchequer many billions of pounds.
However, it would still, it seems, be bound by its commitments, as a member of the G20 group of rich nations and the Organisation for Economic Co-operation and Development (OECD) in respect of the OECD’s base erosion and profit shifting (BEPS) recommendations to prevent tax avoidance by multinationals. The UK government has been keen to be an ‘early adopter’ of BEPS recommendations, with restrictions on interest deductibility due to come into force in 2017. It is thought that leaving the EU is unlikely to soften the current government’s approach to clamping down on tax avoidance by multinationals. We already have the ‘diverted profits tax’ remember.
The EU’s free movement principles protect UK businesses from unfavourable treatment when investing and operating in the EU and European Economic Area (EEA). In particular, current EU directives on interest, royalties and dividends help to make the UK an attractive location for EU holding companies by eliminating withholding taxes in most situations.
If the UK did not join the EEA on leaving the EU it would have to rely on bilateral double tax treaties, which are less generous in some situations.
This may have a negative impact, particularly for companies based in non-EU countries such as the US which might currently consider the UK as a holding company jurisdiction to invest into Europe.
Equally, UK companies which currently use the tried and tested Luxembourg holding company route for European investments might find additional tax payable on repatriation of profits to the UK, leading to a need to incur restructuring costs.
In relation to indirect taxes, if it left the EU the UK would be likely to keep the system of VAT, given the large fiscal contribution it makes to the Treasury. Whilst the tax would be exclusively governed just by UK law, the UK is unlikely to want to depart heavily from the EU rules and jurisprudence since doing that would mean that businesses would have to comply with the UK’s system and the EU’s.
In short , given the economic uncertainty that would inevitably result from a vote to leave the EU, a (potentially fundamental) recalibration of spending and taxation plans and some form of ’emergency budget’ would seem to be highly likely.