A consideration of the potential impact of Brexit on direct taxation in relation to the financial planning process

Brexit and taxation are not two subjects that are mentioned in the same breath that often. But, as a leader of a support business for the financial planning sector, it’s a combination that we thought it was worth giving a little thought to. To start with, and self-evidently, any type of Brexit that doesn’t incorporate the same level of freedom of services as that available to a “full member” will inevitably be detrimental to the UK financial services sector. Most seem to agree that at best it is likely to be some time before any “compensatory” deals on services (let alone goods) outside of the EU are done. Even then, whether they can be as attractive as deals done (by whoever our new trade partners are), with the EU being a bigger buyer than the UK, is also debatable.

Be that as it may (no pun intended), good financial planning should incorporate a degree of anticipation and some appropriate “hedging” where there is uncertainty over potentially material changes that are uncertain. Well, the outcome of the (seemingly interminable) Brexit debate remains the very definition of “uncertain”. In the words of Joe Strummer “Should I stay or should I go?” and the relative merits of each choice are a still a source of serious uncertainty for some. Now, of course, many have immovable positions on this and they are likely to become increasingly immovable with the passage of time – and the increase in anger. But there are more than a few who just don’t know – and especially so in the light of the increasing number of “facts” that were just not available at the time the “will of the people” was first expressed.

Regardless of your own particular view on the rights and wrongs of Brexit it cannot be denied that some form of Brexit is a more than distant possibility. So, given that, what would the likely impact of Brexit on direct taxation be and what, if anything, could or should be done (or at least considered) now (ie. ahead of a possible Brexit) to “hedge” against that anticipated outcome?

Well, first it’s essential to recognise that whatever the aspirations of some hard-line supporters of a fully confederate Europe there has been very little progress towards EU tax harmonisation among member states. Any such change needs the unanimous approval of all members. And the UK have not been alone in consistently opposing any form of harmonisation. There have been some moves towards the establishment of a common consolidated corporate tax base, but we are not really any nearer to establishing that. “Approximation” of the tax codes between member states is about as far as we have got. Since the early sixties, in relation to direct taxation the commonly understood objectives in relation to direct taxation among member states has been eliminating double taxation, enhancing cooperation between national tax authorities and stepping up efforts against cross-border tax avoidance. These objectives have been gradually broadened to include:

(1) eliminating all other tax obstacles hindering cross-border (business) activities and investments within the Single Market;

(2) enabling cooperation between tax authorities to exchange information and assist one another in recovering tax claims; and

(3) countering tax evasion and tax strategies that attempt to reduce liabilities by misusing rights under EU law.

Member states, in determining their own tax codes do however have to ensure that there is no “tax discrimination” between citizens and businesses of all member states. For a number of years now, individuals and companies have challenged national direct tax provisions allegedly hindering the exercise of fundamental freedoms, in particular the freedom of establishment (broadly, the right to set up and manage certain businesses under the same conditions as the Member State’s own nationals), the free movement of workers and the free movement of capital. National tax provisions of both home and host Member States have regularly been found by the European Court of Justice (ECJ) to be in breach of EU law, creating a process of “negative integration” specifying which direct tax provisions Member States should not introduce or maintain and obliging them to amend or to repeal such provisions. The ECJ has consistently stated that, although direct taxation falls within the competence of Member States, they must exercise that competence consistently with EU law. Overall ECJ case law has constrained Member States from using direct taxation to create differential treatment between domestic and comparable cross-border situations within the EU, thereby taking important steps toward creating a “level playing field” across the Single Market.

Once outside of the EU (if that is what happens) we will, on the face of it, be freed from needing to “comply” with alignment (with the core freedoms) and the principle of equivalence and non-discrimination. However, as part of any “post Brexit” deal with the EU, it is likely that some “mirroring” of the commitments of Member States will be a condition.

Subject to that, we will almost certainly continue to offer a low tax zone – especially for businesses – as a material “attractor” to the UK. The current corporation tax rate of 19% (falling to 17% in 2020) is a great example of that.

Of course, a change of Government and a radical change in taxation policy possibly linked to a more radical redistribution philosophy may (indeed almost certainly would) militate against this continued benign state, in relation, in particular, to corporate tax rates.

An indirect result of resolving whatever resolution transpires to the interminable Brexit process will be that the Government will have a little more time to actually govern. One might expect, as a result, to see some greater consideration given to and possibly legislation relating to, some aspects of the tax and financial planning process, for example pensions and estate planning. Stranger things have happened!

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