Tax policy after Brexit

The opinion polls were wrong again; Brexit has won (and as a Lancastrian I was delighted to see the North stay solid for out).  But now the hard work begins of building alternative structures, and deciding what to do with the UK’s new freedom of independent action.

One aspect that didn’t get a mention in the campaign was the huge extent to which the EU already influences the UK’s tax agenda. The most obvious is VAT, but the EU has also controlled or influenced many other areas of tax policy, where the UK will soon be free to choose its own direction.

The next couple of years will determine whether the post-Brexit UK becomes an outward-looking global economy or retreats into nationalistic tariff wars.


VAT has been almost entirely an EU-level tax; not only is it compulsory to have a VAT, of at least 15%, but also the vast majority of the details of the system are governed from Brussels, through Directives and the integrationist interpretation of the European Court of Justice.

The UK can now decide whether it wants to keep VAT at all, and if we do keep it whether we make changes to the system.

VAT is actually one of the less bad taxes, not as economically damaging as income taxes or taxes on capital (although that does not necessarily mean that having a VAT as well as an income tax is the best option), and it raises £115 billion a year in the UK, 22% of total tax revenues, so we can assume that it will be with us for a while.

But what sort of VAT will we have?

We currently have a rather old-fashioned VAT system with lots of reduced rates, zero rates and exemptions.  In contrast; newer systems have a much flatter structure that taxes (almost) everything, which allows a lower rate to raise the same amount of revenue.

But the reduced and lower rates are not generally a good idea.  Not only do they add to the complexity of the system (after 43 years we are still having appeal court cases arguing about what qualifies for the zero or lower rates), they are also distortionary (favouring some products over others, often with no good reason) and they do not give the help to those on lower incomes that they are supposed to do (the package of zero and reduced rates and exemptions actually make very little difference to the amount of VAT paid by those on different income levels, compared to having a single, lower rate applied to everything).

This is one area where the EU has actually been pushing the UK in the right direction; although we were allowed to keep our existing zero rates (most food, children’s clothes, books, etc.), any new ones needed EU approval, which was rarely granted (see, for example, the “tampon tax” row when the government wanted to remove VAT from women’s sanitary products).

Now it has the choice, will the UK government give in to every demand for reduced rates for “special” products, or will it stand up for a sensible, modern VAT?

International tax

First, don’t panic; the UK has a double taxation treaty with every member of the EU. These were agreed bilaterally and separately with each country, independently of the EU system, and so will continue whatever our post-Brexit relationship with the EU is. Although not perfect, these largely prevent double taxation of cross-border business and investment and generally help simplify tax administration for international trade.

We will lose the parent-subsidiary directive and the interest and royalties directive, which largely stop other EU countries from levying withholding taxes on interest, royalties and group dividends paid from their businesses to UK companies, and of course stop the UK from charging withholding tax on royalties and so on paid out by our companies. That will be a pity, because the directives were quite useful in moving profits out of the UK into lower taxed jurisdictions.  But generally the role of the directives will be replaced by the double tax treaties (which, as we saw above, will not be affected by Brexit), which do much the same job, at least reducing and often eliminating withholding taxes.

There is a risk that the UK will adopt a protectionist attitude, using the rhetoric of “tax justice” to tax overseas payments made by businesses based here. But that would be to go against the direction of UK tax policy for thirty years, and would involve renegotiating all of our international tax treaties. The hope is that little will change here.

A more exciting move is that we will no longer have to comply with the EU’s Code of Conduct on Business Taxation.  The Code was an attempt to stifle tax competition, by preventing EU countries from introducing advantageous tax regimes to attract foreign investment. Removing it gives the UK much more freedom to design its own tax system to make us a better place for both domestic and foreign investors, countering any negative Brexit effect on investment.

What’s more, Brexit doesn’t just benefit the UK; several of our associated territories, such as the Channel Islands, were also forced to comply with the Code of Conduct. These islands, with which we have very close business and historic connections, already channel huge amounts of investment into the UK. Once the UK leaves the EU they will also be free of the Code of Conduct and other EU restrictions, allowing us to work together to create a positive tax regime for business and attract investment.

I have written before for the IEA on the advantages of tax competition, of allowing different countries to experiment with different tax systems, and the removal of the Code of Conduct will strengthen that beneficial process.

Various aspects of our tax system, including the recent diverted profits tax (dubbed the “Google tax”), have been attempts to get around the EU rules on what we can and cannot do to tax multinational businesses. Escaping the EU’s restrictions on our tax system should hopefully allow the UK to design a more rational tax system.

The future

Brexit is the start of a process, not the end, and the UK could use its newly regained freedom to move in different directions. Hopefully we will see a better-designed tax system, more open to investment and new business, more internationalist. It would be a great pity if this opportunity ended up with our tax system being used to effectively close our borders and shut out foreign competition.

A lot will depend on who is in charge of tax and public finance. Osborne has not been an impressive Chancellor; having initially been enthusiastic about flat tax and other tax reforms as Shadow Chancellor, he ended up following the Gordon Brown model of huge borrowing and obsessive fiddling with the tax system. What we need now is not another Gordon Brown but another Nigel Lawson or even another Alistair Darling.

Let us hope that the post-Cameron government will be one that takes the best parts of Brexit, the enthusiasm and international openness, and uses this opportunity to design a tax system to encourage that expansive attitude.

Comments (0)

Post new comment

The content of this field is kept private and will not be shown publicly.
Type the characters you see in this picture. (verify using audio)
Type the characters you see in the picture above; if you can't read them, submit the form and a new image will be generated. Not case sensitive.

As in all IEA publications, the views expressed in this blog are those of the authors and not those of the Institute (which has no corporate view), its managing trustees, Academic Advisory Council or senior staff.

Previous blog posts


Diego Zuluaga
27 June 2016

This article is based on a presentation delivered at the Restructuring of the Global Economy (ROGE) conference, Oxford University.   It is a pleasure to address this conference on the...
Philip Booth
25 June 2016

When you read this column, the result of the referendum on Britain’s EU membership will be known. Whatever the outcome, we must leave behind the depressing campaigns and move on to a politics...
Kristian Niemietz
24 June 2016

Suppose there are two countries, 1 and 2, and two (mutually exclusive) policies, X and Y. In Country 1, the majority of people support X, and in Country 2, the majority support Y. ...
Philip Booth
23 June 2016
1 comment

There is a strong Catholic attachment to the European Union. This is especially so in countries where the faith seems to be waning rapidly, such as Germany and Austria. Such attachment is not...
Len Shackleton
22 June 2016

Three main policy drives – on research, teaching quality and the promotion of social mobility – mean that in recent years, state influence over English universities has grown sharply...
Kristian Niemietz
21 June 2016
1 comment

In neoclassical textbook economics, consumer preferences are ‘given’. People come to the market with a fixed set of preferences, expressible as a utility function, and satisfying those...
Frank Hollenbeck
20 June 2016

The United Kingdom will shortly vote either leave or remain in the European Union. This is the most important European event of this century since a vote to leave will likely have important domino...
Kevin Dowd
17 June 2016

Amongst all the extraordinary nonsense spouted in the Brexit debate, on both sides, arguably the most infamous are the recent Treasury reports – here and here – on the impact of Brexit on...
Philip Booth
15 June 2016

It is often argued that taxation to promote the position of the poor is somehow a moral act on behalf of those that are better off and paying taxes to finance the transfers to those who are worse off...
Len Shackleton
13 June 2016

This article forms the basis of a presentation by Prof Shackleton at a seminar at Royal Holloway University of London.   Let me say first of all that I’m not a Brexiteer, at least not yet...
Lawrence W. Reed
10 June 2016

In his book, ‘Biblical Economics’, theologian R. C. Sproul Jr. notes that Jesus "wants the poor to be helped" but not at gunpoint, which is essentially what government force is...
Christopher Snowdon
9 June 2016
1 comment

Of all the attempts of NHS mandarins to blame patients for the spiralling costs of their bureaucratic leviathan, Simon Stevens’ claims yesterday were perhaps the most gratuitously misleading....
Lawrence W. Reed
8 June 2016
1 comment

On June 16, 1992, London's Daily Telegraph reported this astonishingly bold remark by former Soviet leader Mikhail Gorbachev: "Jesus was the first socialist, the first to seek a better life...
Ryan Bourne
7 June 2016
1 comment

Following Michael Gove’s appearance in the Sky “debate” last week, the Stronger In campaign was always going to find some supposed slip-up to exploit. This time it was Gove’s...
Kristian Niemietz and Richard Wellings
6 June 2016

The main objectives of EU transport policy can be placed into two broad categories. The first is to increase economic and social cohesion by improving transport links in order to reduce barriers to...
Kristian Niemietz
3 June 2016

Rent controls are a bit like communism, in the sense that they can never ‘fail’, in the eyes of their supporters – they can only be ‘badly implemented’. Rent controls...
Philip Booth
2 June 2016

On 12 May, Together for the Common Good hosted a debate between Prof Philip Booth and Maurice Glasman at St. Michael’s Cornhill. The article below is based on Prof Booth’s presentation....
Diego Zuluaga
1 June 2016

An article from the IMF’s magazine, entitled ‘Neoliberalism: Oversold?’, has been making the rounds on social media. This is not surprising: bemoan ‘neoliberalism’ in...
Len Shackleton
31 May 2016
1 comment

A BBC investigation shows that the number of public toilets has continued to fall, with nearly 1,800 closing nationwide in the last 10 years. There is no legal obligation on councils to provide...