I have been lecturing on tax and BREXIT issues for four years; carefully avoiding questions on whether leaving the EU was a good move for the United Kingdom or not. This is not only because I believe that you need to try to separate your own views from professional advice; but also, because I firmly believe that the actions that the British government, institutions and people take on the path that they follow after BREXIT are more important than the minutiae of the Withdrawal Agreement and the EU-UK cooperation deal.
Let’s take an example of this. EU member states have until the end of January to decide whether to accept an extension of the EEA Social Security agreement between themselves and the UK. On the one hand the stability of continuing those arrangements should seem attractive. On the other hand, a number of social security authorities may be viewing Brits working in their country as ripe for extra social security contributions.
At the frontiers, much will depend on whether both sides take a light-touch approach to the paperwork required or whether a stricter approach is taken. Confiscating sandwiches and Peri-Peri sauce shows how pettiness can sour relations.
In tax, as in other areas, it is the attitude of decision-makers which will prove to be key. One path would be to continue with EU regulations and minimise the divergence, so as to minimise any friction. This approach was rejected by Boris Johnson and his negotiating team. They saw friction as less important than the ability to develop UK products and services free of EU regulation.
The first moves on regulation were the dropping of DAC 6 which has been gutted to the bare minimum to remain compliant with OECD principles. The UK went through all the procedures for implementing DAC 6; even when it was known that the UK was leaving the European Union; only to drop most of this in the wake of the end of the transition period.
If this approach is continued, one can see movement on state aid particularly in terms of tax reliefs. The government has made it very clear that it wishes to use state resources to boost industries of the future. It is also quite likely to look again at some of the investment relief such as furnished holiday lets and the creative sector, where relief can be claimed for activities anywhere in the European Economic Area.
There have been a number of significant changes where EU regulations have been replaced by UK. There is allegedly a goal under a project called “operation bleach” to replace references to the EU with the UK in a relatively short period of time. The Parent/ Subsidiary directive and the interest and Royalties directive no longer apply to the UK; requiring companies to rely on agreements that the UK has with other member states under their double tax treaties.
The mechanisms for arbitration by the European Court of Justice had been replaced by bilateral arrangements in terms of tax disputes. The UK and Member State tax authorities are still required to cooperate based on the double tax agreements that the UK signed with every member state of the Union. Moreover, the UK has agreed to abide by OECD guidelines in terms of international tax cooperation. How all these new arrangements will work remains to be seen but the fact that a cooperation agreement was signed between the EU and the UK means that there is a better environment for cooperation in dealing with difficulties than there would have been if the UK left with no deal at all.
But back to attitude; many in the UK pointed out that Britain would have been able to accelerate its vaccine approval and rollout even if it had been in the EU, using emergency authorisations. The point that is missed is not that the UK was able to forge its own course but that other European countries were able to do so but effectively delegated their purchasing responsibilities to the European Commission. On the face of it, the decision by the EU 27 was not illogical. The purchasing power of 27 member states acting in concert should have secured supplies both more cheaply and quickly than one state on its own. The fact that this did not happen is a shot in the arm for those who believe that a nimbler approach, free from overregulation is more effective than relying on economies of scale.
I’m sure that in the future we will see occasions where economies of scale will work better for the EU 27. However, the course of the rollout so far has given strength to the argument that divergence may pay dividends. If that view remains in the ascendancy, that will have a long-term effect on the U.K.’s regulatory and fiscal regime.
