IN OR OUT? HOW WILL IT SHAKE THE INDUSTRY ABOUT?
Friday, June 17, 2016
On Thursday 23rd June we head to the polls to vote on whether the UK should remain part of the European Union or leave it. Both sides of the fence have fought hard for hearts and minds, using an array of alarming sums and statistics, speculating on the outcome, and warning about the impact on the UK’s economy and business community.
How you vote is your choice. Here we take an unbiased look at the case for and against EU membership and the potential impact on the accounting profession either way. And we highlight some of the key areas liable to be affected by the outcome of the vote.
Recent reports have indicated that the EU doesn’t, in itself, represent a big market for accountants. Not only are most clients based in the UK, but – particularly where SME clients are concerned – the majority of their revenue is domestically generated. Trading with Europe may, therefore, be less of a concern when it comes to the day-to-day concerns of the average accountancy practice. More relevant is the array of issues and regulations flowing from Europe.
The area that our members are most likely to focus upon is the potential tax implications of a ‘Brexit’. Taxation is something we as a nation currently retain a reasonable amount of control over, but the EU is not short of its own statutes, of which we adhere to. Should we leave the EU, the EU VAT directive, excise duties and use of international financial reporting standards, to mention but a few, are areas that could change.
With our own sovereignty, we are bound to – eventually if not immediately – start exerting our own authority over tax policies. In leaving the EU, the UK would be able to set its VAT and excise duty rates as it sees fit. There would be no reason why the UK couldn’t amend corporate tax laws and add incentives; no longer would we have to seek approval or consent from Europe. EU state aid rules are designed as not to allow the UK to give selective tax advantages – and a parting of ways would clearly mean a greater degree of freedom in that sense.
Given that VAT makes a hefty contribution to the Treasury, it’s unlikely we would see the back of it entirely, but the rates could be set as the Government pleases – especially in extending the zero rate. This is probably indicative of many EU rules and regulations; it is likely much will stay unaltered in the short term because of the disruption it would cause to business to start amending them.
Customs duties would apply to imports from the UK, should we leave the EU, it’s almost certain. It reduces our competitiveness in Europe. The effect is equally as harmful in reverse if the UK puts an import levy on EU goods, making materials and products more expensive for British businesses. Add tariffs and customs clearance to anything being traded across borders and there is doesn’t take much to imagine the stress it will put on the businesses that UK accountants support.
Given the EU’s propensity for tight tax policies and pursuing the proposed BEPS regulations, it is fair to assume that staying in Europe would mean more tax law rather than less in the coming years. The tax environment within the EU is changing – thanks to the OECD – and it’s hard to predict whether they present an opportunity or threat to how we operate. One unified set of corporate tax laws across the EU could certainly help smooth the way for businesses to trade with ease.
There are different membership options available to allow us to trade with and within the EU, even if not a member state. The European Economic Area is an alternative, which to UK would have to request membership of and have this granted. Or we could become members of the European Free Trade Association. Both of these options could see us retaining or adopting EU rules on tax or accounting directives. However, we simply can’t tell whether we will have the option to ‘cherry pick’ the elements we want to keep, or whether we’ll find life much trickier.
International Financial Reporting Standards (IFRS) is an area that our industry may be concerned about seeing any changes. The fact is that the UK has always been fairly hot on high standards across the industry and has readily adopted new standards, both to better strengthen the UK industry and to bring it in line with standards across the globe (extending far beyond the EU). It seems a stretch, therefore, that we would abandon the current standards should we sever ties with Europe.
Thinking beyond tax and trade, according to the Prime Minister pensions may also change. David Cameron has said that, in the event of a Brexit, the Government might not be able to protect spending on pensions. It would represent just one of the “difficult choices”, he said, that the Government would have to make to ‘fill’ the shortfall in public finances.
The public finances will be a big issue to reconcile. Despite mounting opposition already, the Chancellor is likely to push for an emergency Budget in the event of a Brexit vote to provide some clarity over changes that will need to be made. It may refer to the tax regime, but possibly it will be too early for that and the ramifications will take longer to understand. Given that even if we exit the EU, we will still formally be a member for at least two further years, we are highly unlikely to see any drastic changes overnight.
For the risk adverse, staying within the EU is the safest option. An exit means uncertainty and years of upheaval across all sectors of business and across Whitehall too. For practices dealing with international clients, or with clients whose business interests are international, there will be even more uncertainties. Trade agreements, tariffs, exchange rate volatility and increasing red tape will become a necessary burden. Any wobble in business confidence effects growth and investment. It’s little wonder that the Bank of England’s Mark Carney has warned of the threat of recession.
The chance to remain part of an organisation greater than the sum of its parts, drawing strength from a group of dynamic allies; or an opportunity to create our own path free of international shackles, more nimble than we currently are... we shall soon see. It is a monumental milestone for the UK and each of us will have our role to play in the outcome.