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Brexit & tax: Thou shalt not make unto thee any haven…

Author

Andy Wood

Andy is a practical, creative tax adviser who assists a variety of clients in achieving their personal and commercial objectives in the most tax efficient manner.

May & Hammond – Veiled post Brexit tax rate threats?

So Mrs May’s speech on the plotted course for Brexit, and particularly the comments by Phillip Hammond, has been interpreted as a veiled threat by the UK that, if it doesn’t get its own way on negotiations, we will be parking the tax haven tanks on the EU’s fastidiously manicured lawn. Of course, this has led to much gnashing of teeth – albeit by those highly predisposed to such forms of mastication.

But really? Let us analyse this a little.

The first thing to state is that there is no generally agreed definition of what constitutes a ‘tax haven’. So, how something measures up will depend on the yardstick being used.

Clearly the UK is not, and will not be, a tax haven…

Probably the best known definition of a tax haven was that set out by the Organisation of Economic Co-operation and Development (“OECD”) in 1998. I note that this was certainly the definition being used 2-3 years ago – but do forgive me if this has subsequently updated.

Here, there were four main characteristics of tax havens:

·      No or only nominal taxes (and offering, or being perceived as offering, a place for non-residents to escape tax in their country of residence);

·      Lack of transparency (such as the absence of beneficial ownership information and bank secrecy);

·      Unwillingness to exchange information with the tax administrations of OECD member countries; and

·      Absence of a requirement that activity be substantial (transactions may be “booked” in the country with no or little real economic activity).

Firstly, there is nothing that I can see in any comments that, following Brexit,  the UK would contemplate dropping its tax rate to zero. So, let’s be sensible and assume that the UK maintains a post Brexit tax rate between 10-15%, it is hard to see that the UK satisfies these characteristics.

The UK is relatively transparent (and there is a drive to further transparency) and it seems to me that there is currently little point in merely booking transactions through the UK. A corporation tax rate of 10-15% seems unlikely to change that.

Clearly, the UK is already a tax haven…

On the other hand, a report on ‘tax havens’ in 2013 by the US Congressional Research Service includes a long list of countries that have tax haven characteristics including the UK, Denmark, the Netherlands and Portugal among others.

So we are already a tax haven and do not know it…

Interesting, the chap conducting the report, also noted that the US the states of Delaware, Wyoming and Nevada, display the characteristics of tax havens. Clearly, this rarely addressed hypocrisy was then quickly swept under the carpet!

Conclusion – post Brexit tax rates

My view is that reducing the tax rate, say, such that it is in line with Ireland’s 12.5% (which will be matched by Northern Ireland by 2018) is not a terrible move. If the UK does this, and ensures that any business taking advantage (in the natural sense and not a Tax Advantage!) needs to demonstrate a substantial presence, then the knock on of job creation and increased payroll taxes might compensate.

Who knows, outside of Europe, there may be the flexibility to provide a reduced rate for industries which will bring with them large skilled workforces or for industries which are particularly?

 

[As an aside, here is a link to, and analysis of, my favourite Theresa May speech]

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