Leaving the EU may not just affect the shape of your bananas!

The biggest event this month (apart from the end of the domestic football season) is the European Parliament Elections in the United Kingdom (UK). This got me thinking about how the UK tax system would be affected if there was a withdrawal from the EU.

You are probably wondering how the EU affects the UK tax system. Depending on your view ‘quite a lot’ and I will briefly explain below (without making you all fall asleep).

All legislation proposed by any member state must adhere to certain EU principles. One set of principles you may be familiar with are the ‘freedoms’ which are set out in the Treaty. The freedoms are the free movement of workers, free movement of services, free movement of capital and the freedom of establishment. If any UK tax laws restrict any of these freedoms then the law will have to be amended to make them compliant or repealed. The scenario where domestic tax law are amended to ensure compatibility with EU law is not uncommon and one example is the ability of companies to utilise losses made in another EU member state.

Some domestic UK tax legislation is implemented to encourage certain sectors or areas in the economy, with Research & Development and Creative Sector tax credit laws being perfect examples. If a measure provides State Aid then it can be potentially illegal. “What is State Aid?” you are all shouting at your screen. State Aid is defined as an advantage in any form whatsoever conferred on a selective basis to undertakings by national public authorities. If a tax measure is seen to provide an unfair advantage and distort the market then the proposal need to be changed or repealed.

Then there is the European Convention of Human Rights. Yes, the same rules used by those clever lawyers to prevent deportation in many high profile cases.

Going back to my initial question, the answer may partially lie in Scotland’s Independence Referendum. If Scotland votes for independence, it will automatically cease to part of the EU. A point raised by one of the Commons’ Select Committees was regarding the VAT. Many items sold within the UK benefit from a VAT charge of 0% with most notably examples being food, clothing and books. The 0% VAT rate was due to the initial agreement obtained when the UK joined the then EC in the 1970s. Does this mean if Scotland leaves the UK and thus the EU, they will have to charge VAT on food at the standard rate like the new accession countries and would the same apply if the UK left the EU?

Then there are the EU Levies. Movement of goods and services within the EU and the European Free Trade Association (EFTA) countries do not generally have taxes levied on them to ensure a free market trade area exists. Would goods sold within the EU be subject be additional tariffs? Would there be trade negotiations or would an independent Scotland and possibly the UK join the EFTA and therefore still benefit from free movement of goods/services?

So what is the answer? In short we probably have no idea. However, from a purely academic point of view, it would be interesting to see the tax effect of a member state leaving the EU. Watch this space following Scotland’s Independence Referendum!

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