More than three years after the referendum, there is still considerable uncertainty about what sort of exit the UK will make from the EU, or even whether it is still possible that we will call the whole thing off. But assuming that Brexit does happen, either on or shortly after 31 October 2019, will the UK then become a tax haven?
One school of thought is that corporate tax rates could be reduced significantly, to make the UK a more attractive location for inward investment. An article in the Express on 20 February 2019 quoted two economists who said that: ‘Attractive tax rates will attract private and commercial capital from around the world in the tax optimisation competition, and the UK will prosper.’
But of course, the UK is free to reduce its corporate tax rates whether it remains in the EU or not. The corporate tax rate has already come down to 19%, with legislation already enacted to reduce it to 17% in 2020, and there is a longstanding pledge for the UK to have the ‘most competitive’ corporate tax system in the G7. So whilst it is possible that rates will come down further, it is far from certain; indeed, the predictions of the economic cost of a no-deal Brexit make it more likely, in my view, that corporate tax rates would rise.
The other key theory is that Brexit has been engineered with a primary purpose of facilitating tax avoidance. A number of commentators appear to think that the UK does not want to implement EU anti-avoidance measures; for example, Jack Peat, writing in The London Economic in June 2018, said that ‘The European Union’s move to end tax avoiding practices within its member states clashes all too conveniently with Britain’s decision to leave the EU.’
I think this conspiracy theory ignores a number of inconvenient truths. Whilst the UK could withdraw from the Anti-Tax Avoidance Directive (ATAD) after Brexit, this would not be consistent with the UK’s strong commitment to the OECD’s Base Erosion and Profit-Shifting (BEPS) project. What ATAD does is to impose a legally binding obligation on EU member states to implement the conclusions of BEPS Action 2 (hybrid mismatches), Action 3 (controlled foreign company, or CFC, rules) and Action 4 (interest deductions). Even if the UK leaves the EU, it remains a member of the OECD and has in fact already implemented the necessary legislation on all three measures – in advance of a number of other member countries. So a withdrawal from ATAD would have little or no impact on UK tax legislation.
The other major EU initiative is Directive 2018/822, known as DAC 6. The key proposals of DAC 6 were summarised in Zoe Andrews’ article in Tax Journal on 23 July 2019. DAC 6 requires the mandatory exchange of information in relation to cross-border transactions which meet one or more ‘hallmarks’. UK tax advisers will be well aware that our own rules on the Disclosure of Tax Avoidance Schemes (DOTAS) have been in place since 2004, and have a broadly similar objective, although many have commented that DAC 6 is wider and will impose obligations to disclose certain commercial transactions, even if there is no tax avoidance motive. So there is little likelihood that the UK will change its mind about DAC 6, even if we leave the EU, and indeed – as Zoe pointed out – HMRC has specifically confirmed that these rules will remain in place post Brexit to tackle international tax avoidance and evasion.
Some may still be concerned that HMRC will no longer want to pursue tax avoidance and evasion after Brexit. This seems highly unlikely, given a long history of seeking to reduce the tax gap and the numerous anti-avoidance measures which have been introduced in recent years. There will, perhaps, be some risk that avoidance will increase simply because of the constrained resources of HMRC, in dealing with the many other issues that are likely to claim their attention in the coming months, but I have detected no loss of appetite to deal with the issue of avoidance.
As an additional backstop (if I dare use that term), the Financial Secretary to the Treasury, Jesse Norman, announced on 22 July 2019 that a new Professional Standards Committee would be established to consider issues relating to the implementation of HMRC powers. The aim of the committee appears to be twofold: to ensure that HMRC has the powers it needs to ‘ensure that everyone pays their fair share of taxes’, but also to ensure that those powers are exercised with appropriate oversight, to maintain public trust.
As Glyn Fullelove, President of the CIOT, noted, calls for additional scrutiny of HMRC have come ‘both from those who believe HMRC are too aggressive in their use of powers and from those who fear that they are not bearing down hard enough on some taxpayers.’
It seems unlikely that the UK will want to encourage avoidance behaviour. The focus on ensuring that HMRC exercises its wide powers appropriately is, in my opinion, a welcome counterbalance to the increasing number of anti-avoidance measures, which often cause additional compliance burdens on those merely seeking to implement commercial decisions. I doubt very much that the UK will become a tax haven after Brexit.
More than three years after the referendum, there is still considerable uncertainty about what sort of exit the UK will make from the EU, or even whether it is still possible that we will call the whole thing off. But assuming that Brexit does happen, either on or shortly after 31 October 2019, will the UK then become a tax haven?
One school of thought is that corporate tax rates could be reduced significantly, to make the UK a more attractive location for inward investment. An article in the Express on 20 February 2019 quoted two economists who said that: ‘Attractive tax rates will attract private and commercial capital from around the world in the tax optimisation competition, and the UK will prosper.’
But of course, the UK is free to reduce its corporate tax rates whether it remains in the EU or not. The corporate tax rate has already come down to 19%, with legislation already enacted to reduce it to 17% in 2020, and there is a longstanding pledge for the UK to have the ‘most competitive’ corporate tax system in the G7. So whilst it is possible that rates will come down further, it is far from certain; indeed, the predictions of the economic cost of a no-deal Brexit make it more likely, in my view, that corporate tax rates would rise.
The other key theory is that Brexit has been engineered with a primary purpose of facilitating tax avoidance. A number of commentators appear to think that the UK does not want to implement EU anti-avoidance measures; for example, Jack Peat, writing in The London Economic in June 2018, said that ‘The European Union’s move to end tax avoiding practices within its member states clashes all too conveniently with Britain’s decision to leave the EU.’
I think this conspiracy theory ignores a number of inconvenient truths. Whilst the UK could withdraw from the Anti-Tax Avoidance Directive (ATAD) after Brexit, this would not be consistent with the UK’s strong commitment to the OECD’s Base Erosion and Profit-Shifting (BEPS) project. What ATAD does is to impose a legally binding obligation on EU member states to implement the conclusions of BEPS Action 2 (hybrid mismatches), Action 3 (controlled foreign company, or CFC, rules) and Action 4 (interest deductions). Even if the UK leaves the EU, it remains a member of the OECD and has in fact already implemented the necessary legislation on all three measures – in advance of a number of other member countries. So a withdrawal from ATAD would have little or no impact on UK tax legislation.
The other major EU initiative is Directive 2018/822, known as DAC 6. The key proposals of DAC 6 were summarised in Zoe Andrews’ article in Tax Journal on 23 July 2019. DAC 6 requires the mandatory exchange of information in relation to cross-border transactions which meet one or more ‘hallmarks’. UK tax advisers will be well aware that our own rules on the Disclosure of Tax Avoidance Schemes (DOTAS) have been in place since 2004, and have a broadly similar objective, although many have commented that DAC 6 is wider and will impose obligations to disclose certain commercial transactions, even if there is no tax avoidance motive. So there is little likelihood that the UK will change its mind about DAC 6, even if we leave the EU, and indeed – as Zoe pointed out – HMRC has specifically confirmed that these rules will remain in place post Brexit to tackle international tax avoidance and evasion.
Some may still be concerned that HMRC will no longer want to pursue tax avoidance and evasion after Brexit. This seems highly unlikely, given a long history of seeking to reduce the tax gap and the numerous anti-avoidance measures which have been introduced in recent years. There will, perhaps, be some risk that avoidance will increase simply because of the constrained resources of HMRC, in dealing with the many other issues that are likely to claim their attention in the coming months, but I have detected no loss of appetite to deal with the issue of avoidance.
As an additional backstop (if I dare use that term), the Financial Secretary to the Treasury, Jesse Norman, announced on 22 July 2019 that a new Professional Standards Committee would be established to consider issues relating to the implementation of HMRC powers. The aim of the committee appears to be twofold: to ensure that HMRC has the powers it needs to ‘ensure that everyone pays their fair share of taxes’, but also to ensure that those powers are exercised with appropriate oversight, to maintain public trust.
As Glyn Fullelove, President of the CIOT, noted, calls for additional scrutiny of HMRC have come ‘both from those who believe HMRC are too aggressive in their use of powers and from those who fear that they are not bearing down hard enough on some taxpayers.’
It seems unlikely that the UK will want to encourage avoidance behaviour. The focus on ensuring that HMRC exercises its wide powers appropriately is, in my opinion, a welcome counterbalance to the increasing number of anti-avoidance measures, which often cause additional compliance burdens on those merely seeking to implement commercial decisions. I doubt very much that the UK will become a tax haven after Brexit.
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