Risk & Economy » Tax » Has Brexit killed the EU’s tax harmonisation plan

Has Brexit killed the EU's tax harmonisation plan

Where next for the EU's attempts to harmonise VAT across its member states? asks Nicholas Hallam

Written by Nicholas Hallam is chief executive of VAT consultancy Accordance

IN LATE 2013 – that prehistoric era when Brexit was largely considered the unachievable fantasy of a few political obsessives – I wrote and asked Daniel Hannan, Conservative MEP and long-term campaigner against the UK’s membership of the EU, what he thought about the prospects for the European Commission’s then dream for EU VAT harmonisation: the Single European VAT Return (now mothballed).

In a thoughtful and skeptical response, Hannan mentioned something I did not know (that VAT was treated as part of the European Commission’s ‘own resources’ – as a matter of European law, a proportion of the VAT take from all member states goes directly to Brussels). He further commented: ‘the Commission clings hungrily to VAT as, first, its one sure source of independent income and, second, the only successful example so far of the tax harmonisation that it now wants to extend across the board.’

To Hannan, the EU’s VAT policy was a typical instance of the relentless undemocratic grab by European institutions at controls and resources that were rightly the property of sovereign nation states. And he had an obvious point: how many voters were even aware that tax was being collected from them in this manner?

Nevertheless, at the time, and even reflecting on it later, it seemed relatively abstruse; and, like other jurisprudential and technical-fiscal based objections to the EU raised in the run up to the referendum, unlikely to have a major impact on the UK public’s consciousness. Hardly anyone would know the detail of the VAT issue; and, as far as the broader principles were concerned, did the population of the UK really care about the mechanical displacement of the English common law by the rationalist idealogues of the ECJ? Surely it did not. Project Fear would win, because it always did. In the (perhaps now discredited) piece of received wisdom: ‘it’s the economy, stupid’.

Among the shocked losers, the 48% (a grouping apparently containing a full spectrum elite running from the The Guardian and Emma Thompson to Richard Branson and the CBI), it has likewise been common to interpret the Brexit vote as being a mere spasm of frustration and anger at a perceived deluge of immigration, with no deeper principle involved. The result was, on this view, a consequence of a delusion created by unscrupulous demagogues, pandering to latent racism.

And, in the VAT area, it is certainly true that Leave campaigners were opportunistic in their pro-Brexit arguments. In one of the few specific bits of policy proposed before the vote, Conservative MP Priti Patel repeatedly pledged that VAT would be cut on fuel should the UK vote to leave the EU. The Leave campaign narrative was that it was only because of EU that we need to have VAT on fuel at all; it was yet another arbitrary, costly, debilitating encumbrance.

This may be true today; the EU does indeed demand a minimum 5% VAT charge on energy as a condition of membership. But, as the journalist Tom Goodenough detailed in piece on the controversy, the reason why the UK has any VAT on energy at all is that a Conservative chancellor, Norman Lamont, decided in 1994 to unilaterally abandon (under no pressure from Brussels) the UK’s zero rate on fuel. Indeed, Lamont attempted to bring in VAT on fuel at the then standard rate of 17.5%; an 8% reduced rate was actually adopted; and it was Gordon Brown that eventually reduced it to the current 5% level. (Like many tax hikes, Lamont justified this one in the name of saving the environment – he believed the charge put the UK on the way to achieving the carbon emission targets set in Rio in 1992.

Nevertheless, Hannan, now famous for being one of the leaders of the UK’s biggest political upset since Churchill’s defeat in 1945, is not willing to accept the analysis of the vanquished Remainers. In a Spectator piece last week, he attacked the presumption that Leave voters were motivated by anger and prejudice:

Against the various theories offered by pundits, we have one massive data set. On polling day, Lord Ashcroft’s field workers asked 12,369 people why they had just voted as they had. The answer was unequivocal. By far the biggest motivation for Leave voters was ‘the principle that decisions about the UK should be taken in the UK’, with 49% support. Control of immigration was a distant second on 33 %.  

Stood in the way of tax harmonisation 

His remarks gave me pause; not least because I saw them on the same day a colleague alerted me to the existence of The French VAT System and Revenue Efficiency, an ‘economic brief’ released by the European Commission in July – i.e. in the month following the Brexit decision. The document’s summary ends thus:

We also take a close look at the rationale used to justify the various reduced rates for specific categories of goods and services and question whether reduced VAT rates are the best tool to achieve the policy goals. In our opinion, there are strong economic arguments for having a simple VAT system, with a limited use of reduced rates. Finally, we suggest a number of ways to improve the efficiency of the VAT rate structure in France.      

The brief is essentially a long polite scolding for France; the Republic’s particularly offensive misdemeanor being persisting with reduced VAT rates in sensitive sectors, such as the restaurant trade.

No doubt the authors mean well; they always do. It appears to be simply incomprehensible to them that cultural differences (this is France they are talking about; the home of cuisine itself) should stand in the way of uniform tax efficiency. But the timing is astonishing, as is the general deafness to the surrounding political context, and the lack of transparency about beneficiaries of the proposed reforms: at no point, for example, is it mentioned that VAT contributes to the Commission’s ‘own resources’. Indeed, the brief’s most revealing and blackly humorous line is in the legal notice that serves as an introduction: ‘This paper exists in English only’.

You don’t need to be an ardent French patriot to find such unconscious highhandedness exasperating. And it is perhaps unsurprising that in polls conducted just prior to Brexit the French public were 61% unfavourable against 38% favourable in their attitude to the EU. (In the UK, the comparable numbers were 48% unfavourable /44% favourable. And we know what happened here).

Having left the EU, the UK no longer has any say in the indirect tax policy of its largest trading partner. Depending on the economic weather, that may become a source of regret; it will certainly increase complexity for outward bound British firms. [In future pieces we will update readers of Financial Director about emerging and ongoing VAT projects in the EU].

But, if the European Commission cannot adapt itself to the actualities of the remaining member states, it cannot be long before the UK has company on its journey outside the EU.

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