Ahead of the EU referendum, we were warned by the Chancellor that should we choose to leave the EU, he would have no choice but to increase taxes. Now we have the result, was this just campaign talk, or should you brace yourself for some substantial tax changes?
As anticipated, the leave vote initially triggered press reports predicting tax mayhem. This was partly caused by the Chancellor’s forecast of rising taxes to accommodate a contraction in the UK economy.
A reality check?
In our view the Chancellor’s dire predictions of higher tax bills were always more about politics than genuine financial forecasts. The possibility of an emergency budget has been ruled out, despite the success of the leave campaign and the expected economic downturn. It seems it is much harder to predict the impact of the leave vote on the economy, although there have been reports of considerable contraction. The lower pound and jittery stock markets are merely a knee-jerk reaction to a significant event and the long-term effects might not be as dramatic.
EU and UK Taxes
The UK tax system is not controlled from Brussels, in contrast to the reports you might have heard in the build up to the referendum. The EU’s main influence on direct taxes, eg, income tax and corporation tax, is principally limited to preventing the UK from using them to create excessive ‘state aid’ for business. This applies to all EU member states. There are other tax issues which might be affected, such as cross border profits, but these only affect companies with branches in the UK and other EU member states.
VAT
As a result of VAT being more closely aligned across EU member states than other taxes, you might think that changes to its rules were inevitable. The UK and other EU states will want to maintain trade terms so that the European Economic Area free-trade status continues to operate even after we are outside the EU. This will mean that the UK continues to broadly follow the EU’s lead on VAT.
Depending on how the economy performs in the second half of 2016, there might yet be changes to the Autumn Statement reflected in next year’s Budget.