Government plans to leave Single Market and Customs Union

Following Cabinet discussions at Chequers, the government has now issued a detailed policy paper setting out its commitment to leave the Single Market and Customs Union post Brexit, although it is looking for regulatory equivalence across a number of areas, including audit and accounting standards, and financial services

After a spate of senior Cabinet resignations, the government has now released the 104-page paper setting out their latest negotiating position for Brexit.

It is committed to leaving the Single Market and the Customs Union, ending free movement and the jurisdiction of the European Court of Justice (ECJ), which has been influential in a number of significant tax appeal cases. As expected it will also leave the Common Agricultural Policy and Common Fisheries Policy.

There is limited information about the impact of possible VAT and tax changes although the UK is will want to ensure that it has an attractive business environment for inward investment and incentives to keep major supply chain reliant businesses based out of the UK.

There is also confirmation that the government will pull out of the Single Market mechanism which means the UK can no longer operate under the EU’s ‘passporting’ regime for financial services.

In addition, given the importance of financial services to financial stability, both the UK and the EU will wish to maintain autonomy of decision-making and the ability to legislate for their own interests. For example, in some cases, the UK will need to be able to impose higher than global standards to manage its financial stability exposure. The main thrust of the paper on financial regulation is to achieve a regulatory equivalence approach.

Andrew Gray, head of Brexit for PwC, said: ‘The Government has changed its preferred course on financial services. The so-called mutual recognition model has been dropped, instead access would be built on improving the EU's current equivalence arrangements.

‘There are a number of issues with the EU's current approach to equivalence - most notably that it does not cover key activities such as insurance and deposit taking. Equivalence decisions can also be reversed at short notice and the process can be unpredictable at times. The Government is proposing that these issues are addressed by the EU by covering all key sectors and by making the equivalence process more predictable for businesses.

‘Despite this being a credible proposal, businesses should know that there is still a risk of no deal and therefore should continue to plan for this scenario.’

‘The decision on whether and on what terms the UK should have access to the EU’s markets will be a matter for the EU, and vice versa,’ the paper stated. ‘However, a coordinated approach leading to compatible regulation is also essential for promoting financial stability and avoiding regulatory arbitrage.’

Border and customs

To ensure that new declarations and border checks between the UK and the EU do not need to be introduced for VAT and Excise purposes, the UK proposes the application of common cross-border processes and procedures for VAT and Excise, as well as some administrative cooperation and information exchange to underpin risk-based enforcement. These common processes and procedures should apply to the trade in goods, small parcels and to individuals travelling with goods (including alcohol and tobacco) for personal use.

In terms of wider tax policy, the white paper says that any ‘proposal for its future economic partnership with the EU would not fetter its sovereign discretion on tax, including to set direct or indirect tax rates, and to set its own minimum tax rates’.

Tax and anti avoidance

Apart from VAT, the UK sets its own tax rates as the EU does not have a centralised tax policy or rate setting powers. However, the UK has adopted a number of EU directives affecting tax and anti-avoidance legislation with the draft documents accompanying Finance Bill 2018-19 setting out adoption plans to comply with the Anti-Tax Avoidance Directive (ATAD) which will see changes to the controlled foreign company rules and the approach to hybrid mismatches in the event of Brexit. In addition, an amendment to VAT rules will create a one-stop shop (OSS) for VAT on distance sales, which was passed last autumn and must be adopted by 2021.  

Other EU Directives on the table and still up for debate at the European parliament include discussions on setting up a Common Corporate Tax Base (CCTB) across EU member states, although this has met opposition from various countries, including the UK.  

Professional services firms cross-border

The UK and EU economies rely on the cross-border provision of professional services, including audit and accounting. In 2016, UK accounting and audit services firms provided over 14% of EU27 audit and accountancy imports.

In terms of legal services, the UK is the destination for 14.5 % of total EU legal services exports.

In addition to the general services provisions, the UK proposes supplementary provisions for professional and business services, for example, permitting joint practice between UK and EU lawyers, and continued joint UK-EU ownership of accounting firms.

The supplementary provisions would not replicate Single Market membership, and professional and business service providers would have rights in the UK and the EU which differ from current arrangements.

Audit and accounting

The government is also seeking EU equivalence and adequacy decisions under the EU’s audit and accounting third country regimes by the end of the implementation period, to ensure audit and accounting standards, such as International Financial Reporting Standards (IFRS) and ISA (International Standards in Auditing) are still effective.

State aid

The UK has been among the lowest granters of state aid as a proportion of GDP in the EU. In 2016 the UK gave 0.3% of GDP as state aid, half the EU average of 0.7%. Currently state aid has to be approved by the European Commission before subsidies can be put in place.

Going forward, the government is committed to continuing the control of anti-competitive subsidies by creating a UK-wide subsidy control framework. The Competition & Market Authority (CMA) will take on the role of enforcement and supervision for the whole of the UK.

The Brexit document states that the UK would ‘make an upfront commitment to maintain a common rulebook with the EU on state aid, enforced by the CMA’.

The Brexit paper, The Future Relationship Between the United Kingdom and the European Union, published 12 July 2018

Report by Sara White

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