Theresa May Announces Hard Brexit

By Global Tax Weekly

For all the anticipation, last week’s revelation by Prime Minister Theresa May that the UK is headed for a “hard Brexit” wasn’t quite the seismic shock it perhaps should have been. People have had so long to ruminate on all the myriad possibilities for the UK’s post-Brexit relations with the EU that most have concluded that if out is to truly mean out, then hard Brexit it has to be. But at least we know now.

As the EU’s most influential figures have been insisting for the last six months, membership of the Single Market and the “four freedoms” that go with it are indivisible: you can’t have one without the others. Otherwise, it would be a double market, or a triple, or a quadruple market, which defeats the whole purpose of the thing. It became fairly obvious early on that a “soft Brexit” i.e. the UK’s continued membership of the Single Market, would necessarily entail continued interference – as Leave supporters perceive it – by the EU in the UK’s political, economic, legislative, and social affairs. At the same time, the UK’s influence in the EU would be substantially diminished, yet it would still have to stump up membership fees. In other words, the worst of all worlds if you are a Leaver, and certainly not what the (albeit slender) majority of voters wanted.

Hard Brexit means there are going to be advantages and disadvantages for UK taxation once the deal is done. On the one hand, the government of the day will have a lot more freedom over tax policy. There will be no more worrying about state aid or discriminating against taxpayers from EU countries (in theory). Therefore, the UK will have much more scope to offer tax incentives (as long as they’re not “harmful”).

But disentangling the UK tax system from the EU is going to be no easy task. Think about all the EU legislation and regulations that have been transposed into UK law over the past four decades, not to mention the thousands of pages of case law issued by the EU courts. How will these be dealt with in the negotiations? How long will EU case law apply in the UK? And will the UK seek to repeal EU-related law wholesale, bit by bit, or in the interests of stability, not at all? And we haven’t even mentioned VAT yet, the only tax which is “harmonized” at EU level. For UK taxpayers, the future either looks very exciting, or really quite scary. I haven’t quite made up my mind which.

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