Chartered Institute of Public Finance and Accountancy (CIPFA) chief executive Rob Whiteman looks at the implications of Brexit for the UK tax system.
Shortly before Christmas, the Chancellor of the Exchequer, Philip Hammond, joined finance ministers from Spain, Italy, Germany and France to voice their concerns over the US President’s tax reform agenda.
Donald Trump’s changes to the US tax law, which have now been approved by the House of Representatives, will mean significant tax cuts for corporations, minor deductions for individuals and will increase the tax burden on foreign companies operating in the country. It’s estimated that this will amount to $1.5tn in tax cuts and may put a worryingly large strain on the country’s expanding deficit.
It was encouraging therefore that Philip Hammond sided with his European colleagues.
The decision could be interpreted as a symbolic gesture, suggesting that the Government is opposed to relaxing the UK’s own tax laws to the same extent, which is a concern for many who fear the UK could be turned into a tax haven and a race to the bottom once it has left the EU; a notion that gained some currency last year, after the Government’s secret deal with Nissan.
At the All Party Parliamentary Group (APPG) on Responsible Tax’s seminar on the post-Brexit future for the UK tax system late last month, the fear that the UK will become a tax haven was dismissed as not just unadvisable but also unlikely. Indeed, the consensus amongst the speakers, including Nicky Morgan MP and Frank Field MP, was that Brexit may actually present an opportunity to create a fairer and more sustainable tax system.
One of the most compelling ideas discussed was how tax could be used to raise additional revenue for health and social care. And while this was a viable option inside of EU, as national insurance levels are not determined by member states, it was argued that Brexit could provide further stimulus for reform measures.
Health and social services need to be brought back from the financial precipice. However, in order for this to be achieved, public perceptions towards tax would have to change. Indeed, according to the British Attitudes Survey 2017, nearly half of the population (44%) think the Government should not raise taxes to increase public service spending. In comparison, in Scandinavian countries, where there is a high-tax and high-welfare system, there is a greater acceptance of its necessity. The EU social survey (2012) showed there are the highest levels of support for a country’s tax system are in Denmark and Norway. And so, before any changes in policy were introduced, there would need to be efforts to remind the nation why we pay tax at all and the value of what we are paying tax for.
As well as reformulating tax systems to channel increased income towards public service funding, a new post-Brexit system should also be used to develop skills and regional productivity. Although it is not clear exactly what options might be available, as it is very much shaped by what trade deal we negotiate, the Government should be examining the potential here, and making sure that regions are part of the conversation.
Whilst question marks still remain over the future of UK taxation post Brexit, the Chancellor’s criticisms on US proposals do not only ease fears that the UK will adopt a similar style model, but also signal that the UK will align closely with EU on tax legislation. And considering that the EU has finally stepped up to the plate in terms of working to combat tax evasion with its tax haven blacklist, the UK ought to maintain close links to ensure it can continue to play a central role in this global effort. Indeed, as the EU Commission says, ‘a single country cannot solve the problem on its own’, and it is certainly one that needs solving.