Indirect Taxes: United Kingdom: Brexit expected to affect tax policy for at least a generation.

AuthorSalmond, Giles
PositionBritish exit from the European Union

On June 23, 2016, the United Kingdom voted in a national referendum on whether the UK should remain a member of the European Union. It was a simple in-or-out question asked of the British people, of whom 51.9 percent voted to leave the EU and 48.1 percent voted to remain. The consequences of this so-called "Brexit" vote will shape the future of the UK for perhaps a generation or more.

The UK has been part of the EU (originally the European Economic Community, or EEC) since January 1, 1973. Membership in the EU has had a major impact on the UK's ability to trade with the rest of the EU. The founding treaties are based on four so-called fundamental freedoms: free movement of goods, free movement of persons, free movement of services, and free movement of capital. These fundamental freedoms and other rights and obligations of EU membership are laid down in various EU treaties and secondary legislation such as EU directives and regulations.

The single market created by the EU has greatly facilitated trade between EU member states as well as the free movement of travelers and workers. Since joining the EU, the UK has opted out of certain obligations of EU membership. For example, it is not a member of the eurozone and so does not share the EU's common currency. It is also not party to the Schengen Agreement, which allows free movement of persons, with no border controls, between most EU member states (the exceptions being Bulgaria, Croatia, Cyprus, Ireland, Romania, and the UK) and a few non-EU States: Iceland, Norway, Switzerland, and Liechtenstein.

Following the referendum and a vote in the UK Parliament, on March 29, 2017, the UK government gave the European Council formal notification under Article 50 of the Treaty of Lisbon of the UK's intent to withdraw from the EU. It is still uncertain when the UK will formally exit, but Brexit is anticipated to happen by March 2019, two years after the UK's Article 50 notification. Paragraph 3 of Article 50 provides that "The Treaties shall cease to apply to the [withdrawing] State in question from the date of entry into force of the withdrawal agreement or, failing that, two years after the notification referred to in paragraph 2, unless the European Council, in agreement with the Member State concerned, unanimously decides to extend this period." The remaining member states have made it clear that they wish to agree to the formal process for the UK leaving the EU (which will identify how much the UK must pay into the EU budget for previous commitments) before the UK is entitled to agree to any form of trade deal with the remaining member states.

The exact mechanism for a member state's exit from the EU under Article 50 is unprecedented, and much remains uncertain about how the withdrawal process will unfold. This article will focus on how the UK's exit from the EU will affect indirect tax in the UK and will consider the changes to value-added tax (VAT) and customs duties that Brexit might bring. Currently, the operation of both VAT and customs duties in the UK depends wholly on EU law.

The UK government has said, "At the heart of [the referendum] decision was sovereignty. A strong, independent country needs control of its own laws. That, more than anything else, was what drove the referendum result: a desire to take back control." (1) Whether a desire to reclaim sovereignty truly was in the minds of those who voted to leave the EU, it will undoubtedly be the issue of greatest impact for the UK upon leaving the EU. This will be acutely apparent for the operation of both VAT and customs duties, and to a certain extent other indirect taxes such as excise duties, which are all taxes charged on the supply and movement of goods and the supply of services within and beyond the EU.

Supremacy of EU Law

When the UK joined the EEC (which subsequently became the EU), Parliament gave supremacy to EU law insofar as rights and obligations were created by the UK's membership in the EU. (2) The supremacy of EU law and the UK's requirement to adhere to decisions of the Court of Justice of the European Union (CJEU) will end upon Brexit. This will leave a huge gap in the UK's legislature, and so the UK government intends to incorporate existing EU law into UK law at the moment the UK leaves the EU. The UK government has also said that the decisions of the CJEU up to the point of Brexit will be binding on UK courts in the same way that decisions of the UK Supreme Court are. The effect will be that the CJEU judgments that have been delivered up to the point of the UK leaving the EU will be binding on UK courts, unless and until the UK Parliament legislates to neutralize or vary the impact of any particular decision of the CJEU.

The Conservative Party Prime Minister, Theresa May, has called an election, she says, "to guarantee security for years ahead" and no doubt she will be hoping to increase the Conservative Party majority in Parliament, which she hopes will enable her "to make a success of Brexit." Before the government called an election to be held on June 8, 2017, the UK had set out in a white paper (3) the framework for achieving a smooth transition from the UK's membership in the EU to its place in the world outside the EU. In short, the UK intends to enact legislation that will repeal the European Communities Act 1972, the legislation that gives effect to EU law within the UK. The "Great Repeal Bill," as this proposed legislation has been labeled, is a bit of a misnomer, as it will also actually incorporate the existing body of EU law (known as the "acquis") into UK law. It is said that by so doing, it will allow businesses to continue operating, knowing that the rules have not changed...

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