The UK must not rush to make wholesale changes following the greater tax flexibility it will be afforded leaving the EU, according to CIOT tax policy director, John Cullinane
This vote creates a large amount of uncertainty, in tax as elsewhere, and there is sympathy for tax advisers facing questions from their clients that there are no clear answers to at present.
Out of the EU we will have more options to vary our tax system but it is far from clear whether government would, or should, take them up. Abolishing VAT on domestic fuel, for example, will no doubt have its advocates, but if the aim is to target help at the less well off there may well be more effective ways to achieve this.
The temptation will no doubt be there to create differences in VAT with our trading partners but the government should give careful consideration to whether the benefits of any change outweigh the additional complexity this would create.
Similarly the removal of state aid restrictions will create new options for government but just because the option is there to give some firms special treatment does not mean that it is sensible policy to do so.
A great deal will hang on the relationship we ultimately end up having with the EU. If we end up in a European Economic Area (EEA) or European Free Trade Association (EFTA)-style agreement some of these rules, such as state aid restrictions, may end up being retained.
In all these matters it will be important for the government to consult carefully with business, tax professionals and others on the practical implications of policy changes, and for the government to be as clear as possible as early as possible which EU laws they intend to retain and which they intend to repeal. Business hates uncertainty and anything which can provide them with greater confidence on the environment they will be operating in for the future will be helpful.
Finally, while the chancellor did raise the prospect of an ‘emergency Budget’ during the referendum campaign, he has erred on the side of caution and ruled out such a move. Given the leadership election now pending it is safe to suspect that any decisions will end up being delayed until the Autumn Statement.
If the Treasury sticks by its forecasts and if under a new prime minister the government sticks to its balanced budget targets they will need to be pencilling in in the Red Book some combination of tax hikes and spending cuts, even if not for implementation immediately. Of course they could change the target or forecasts or both, but something in that set of equations must give.
