Before the vote the Chancellor indicated there could be massive tax rises if we chose to leave the EU. Was this just campaign talk or are there likely to be some substantial changes to the tax system?
Scaremongering? As expected, the leave vote initially triggered press reports predicting tax mayhem. This was partly caused by the Chancellor’s forecast of the extra tax he would need to raise assuming there was 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. He’s already more or less ruled out the emergency budget, which he indicated would take place in the event of a successful leave campaign. In reality it’s far too early to say what effect on the economy the exit will have. The lower pound and jittery stock markets are merely a knee-jerk response to such a significant event and only time will tell if the effects will be long term.
EU and UK taxes. Despite what you may have heard leading up to the vote, the UK tax system isn’t controlled in Brussels. The EU’s main influence on direct taxes, e.g. income tax and corporation tax, is principally limited to preventing the UK (and other EU member states) from using them to create excessive “state aid” for businesses. There are other tax issues which may be affected, such as cross border profits, but these only affect companies with branches in the UK and another EU member state.
VAT. Because VAT has been more closely aligned across EU member states than other taxes you might think that changes to its rules were inevitable. However, 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. That will mean continuing to broadly follow the EU’s lead on VAT.
Wait and see. Depending on how the economy performs in the second half of 2016 we might see some minor changes announced in the Autumn Statement and next year’s Budget.