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Brexit: a 'Once in a Generation Chance' to Reform the UK Tax System

Laurence Field, Partner, Corporate Tax
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Brexit presents a unique opportunity for a rethink and complete overhaul of the UK tax system

Whatever the terms on which the UK eventually leaves the EU, Brexit presents a once in a generation opportunity for the UK to consider the type of country it wants to be. The role of the state and the way in which companies and individuals are taxed needs to be considered by leaders and organizations with vision, foresight and drive.

However, given the way in which the preceding negotiations have fared so far, this is increasingly looking unlikely.

The last couple of years have been about the UK deciding what it wants its relationship with the rest of the world to be, but it has also been a time of introspection regarding the type of broader society we want to create.

Some have argued for a low tax “Singapore of Europe” approach to strengthen the economy; “freewheeling” capitalism generating creating jobs, tax revenues and wealth. Others are more focused on equality and fairness; that everyone should pay “their fair share of tax” and contribute to create a more equal society.

The forthcoming Spring Statement, which will be delivered just over two weeks before the 29 March Brexit deadline, is unlikely to see any radical reforms, but it could signal the direction of thinking by the government or be used as an opportunity to modernize the tax system at the heart of the political agenda for years to come.

The UK’s Victorian Tax System

Brexit - whatever it looks like and however it is achieved, provides an opportunity to consider the future. The UK tax system was created in the 19th century Victorian era or even earlier, many of the key concepts arise from a time when company directors in Mayfair would make decisions about gold miners in South Africa—albeit with a significant delay between decision and implementation.

The modern economy works at the click of a button, goods, services, capital and our futures fly around the internet at the speed of light. The outcry about the taxation of the digital giants (and a few years ago the global coffee chains and next year most likely something else) is not necessarily due to corporate abuse, but because of an outdated tax system created at a time of the British Empire that no politician has had the courage to reform, because of the inevitable loss of political capital dealing with winners and losers.

The most recent UK Budget in November 2018 (and likely the last before the UK leaves the EU), attempted to introduce some initiatives which would give the UK the right to tax big tech firms operating within its jurisdiction. There was a sense that the UK Chancellor was hoping that another major economy would come to the fore and propose something similar, so that the UK would not have to go it alone.

The Organization for Economic Co-operation and Development has now put forward some plans of its own to modernize the global tax system, with some fundamental changes to how companies will be taxed. This could be the springboard for post-Brexit “Reboot Britain” to work out its tax future.

Looking Forward

What should be the priorities of the tax system, post 29 March 2019?

Brexit should be an opportunity to reset the clock and stop tinkering at the edges. The tax system drives so many behaviors: savings, investment, consumption and public spending - now is the time to decide what our post EU society should look like. We need leaders who are willing to roll up their sleeves and take on the vested interests - not always tinkering at the margins with one eye on their supporters or the next general election.

Fairness and equality have become an increasing part of the tax agenda. Recently a British think tank, the Resolution Foundation, demanded that the government overhaul its “Byzantine system” of tax reliefs, which it claims are worth 165 billion pounds ($218 billion) a year, or 6,000 pounds per household.

It’s worth remembering that few people want to pay more tax themselves, though many would like others to pay more tax from which they then benefit.

One person’s tax relief is another’s loophole. It will take real leadership to determine whether relief from capital gains tax on your home is more worthy than encouraging people to save for their old age through pensions. Should entrepreneurs who risk their own capital have a lower tax rate than the people they employ? Would a flat tax encourage more investment, more jobs, more work?

Hard decisions need to be made, which will naturally create winners and losers. No government in living memory has had the nerve to tackle these issues, but post EU “Reboot Britain” needs to determine what it wants to be. The Brexit process is an opportunity to look at these issues that is unlikely to be repeated in our lifetimes. Will our leaders have the vision and courage to do this? It remains to be seen.

This article first appeared in Bloomberg Tax in March 2019.

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Laurence Field
Laurence Field
Partner, Corporate Tax