June 2016 saw the making of perhaps the biggest political decision of our lifetime, as the UK voted to leave the European Union. One of the key arguments of the Leave side was that, outside of the European Union, the UK would have much greater sovereignty and a better ability to control its laws. But what will happen to tax policy after Brexit?
All EU legislation will still apply to the UK while negotiations for the terms of its leaving are ongoing. These negotiations will take roughly two years once they begin, although there are no immediate plans for them to start.
While it’s currently difficult to say much for sure, there are a few elements of tax policy that can be speculated about.
Before the referendum vote, Chancellor George Osborne indicated that he would call an emergency Budget if the UK voted to leave. This Budget was slated to include tax increases and public spending decreases.
However, Osborne has since reneged on this suggestion, and a Budget is now expected in October after the Conservative leadership race has finished. This Budget will be held under a new Prime Minister and would likely start to come into effect in late 2016 or early 2017.
The lack of confidence and the high amount of uncertainty in the current climate may lead to cautious economic policy on behalf of the Chancellor and the Bank of England.
Short-term Impacts and Changes
The Chancellor has, however, announced one fairly immediate tax change. Corporation tax is set to be cut even further, perhaps to 15% or lower.
The UK already has one of the lowest corporation tax rates in Europe at 20%, but the Chancellor feels that the uncertainty brought by the Brexit vote may lead to some firms moving their headquarters to elsewhere in Europe. As such, the corporation tax cut is an incentive for them to stay.
Such a cut would give the UK the lowest corporation tax of any major economy in the world.
Some tax legislation on areas such as Making Tax Digital was put on hold before the referendum. However, this legislation should begin coming through soon.
Long-term Impacts and Changes
As the UK is still bound by EU law until it has fully exited the EU, some tax changes may not come into effect for several years.
In the run-up to the vote on 23rd June, the Leave campaign claimed that leaving the EU would give the government greater ability to change elements of VAT. For example, it was claimed that VAT on fuel could be amended.
VAT is underpinned by EU law, but it will almost undoubtedly continue in a form very close – if not identical – to its current state after we leave the EU. While more changes may be able to be made to it, such decisions would be left for the government to decide after we have fully exited the EU.
Tax policy may also become simpler out of the EU. The Office of Tax Simplification, part of HM Treasury, may find it easier to recommend changes to the government on the simplification of tax law when EU regulations do not have to be complied with.
How Much is Certain?
Very little of this can be seen as an absolute certainty. After the Conservative leadership race has finished, it is possible that a General Election will be called. If this is the case, economic policy could change drastically depending on the outcome.
The Liberal Democrats have announced that they will stand on a platform of keeping the UK in the EU, and other parties could include similar plans in their manifestos if an election was called. Parties would unquestionably stand on different platforms in terms of tax policy.
Article 50 – the Article that allows the UK to begin its two year negotiation period – will, in all likelihood, not be triggered until at least mid-September, when a new Prime Minister comes into position.
There are currently no concrete plans for the UK’s course in these negotiations. In terms of tax, this may mean that the UK could stay tied in to the EU’s VAT regulations, for example. There will be many conditions to the UK leaving the EU, but it is currently unclear what these will be, or who the negotiating team behind these decisions will be.
As such, we can know little about the long-term impacts of Brexit, tax-based or otherwise, before the negotiations start to take shape and the political climate of the country settles down.
Tax policy after Brexit will include a cut in corporation tax, but little else is known at this point. There will most probably be a budget around the start of October, but this will take place with a new Prime Minister and perhaps a new Chancellor as well.
Tax policy changes will only begin to become clearer when we are further into the negotiation period with the EU.
One thing that’s for sure is that now is a good time to reach out to your clients, reassure them about the economic situation and renew your relationship with them.