UK_F_Brexit

This article was first published in the June 2016 UK edition of Accounting and Business magazine.

As accountants, auditors and their business clients consider whether the UK should remain in or leave the European Union (EU) in this month’s referendum, it has become abundantly clear that there are no simple options.

Remaining in the EU will mean the UK will continue to face demands to accept European taxation policies that government and businesses may find unpalatable, especially as it seeks to cement the City of London’s place as Europe’s, if not the world’s, premier financial centre. But quitting the EU would force the UK to consider uncomfortable trade-offs between commercial access to its neighbouring remaining EU market of 444 million people (excluding British residents) and regaining the political powers that it has transferred to the EU since becoming a member of the then European Economic Community in 1973.

A report from the London School of Economics’ (LSE) Centre for Economic Performance released in February spelt out the stark political choices following a Brexit. Ultimately, the more trade access the UK secures in Europe, the closer it will have to adhere to EU laws and policies over which, following a Brexit, it would have little or no control.

One option noted by the report would be for the UK to apply to join the European Economic Area (EEA) – which currently includes non-EU members Norway, Iceland and Liechtenstein. This EU halfway-house system could limit the economic impact of a Brexit. The UK would recover control of its fisheries and agricultural spending but would have to follow EU rules on many other topics in return for freely accessing non-food EU markets. 

No influence

However, non-EU EEA members have no voice on the EU Council of Ministers and no MEPs in the European Parliament to influence EU legislation. Britain would also, said the LSE, have to pay about 83% as much into the EU budget as it currently contributes. This option would see the UK following EU accounting regulations that insist on the use of international financial reporting standards (IFRS). But it would exempt the UK from EU taxation legislation, such as the EU VAT directive, which insists that standard VAT rates must be at least 15% and reduced rates at least 5%. 

There is also a range of laws limiting EU excise duties that would no longer apply, along with the proposed EU law mandating financial transaction taxes and the proposed directive on base erosion and profit-shifting schemes (BEPS). But of course this presupposes that a ‘Brexit Britain’ would apply for EEA status and, if it did, a remaining EU membership (probably angry with the UK) would let Britain join. 

Another option would be following Switzerland and negotiating bilateral trade deals with the EU. But the Swiss usually have to follow EU rules as the price of such deals. And those deals are struck only where the EU wants to grant them market access – there is no Swiss-EU free trade deal on services, a key UK export – and of course that includes accounting.

The LSE warned that the UK could end up like Canada; despite the North American Free Trade Agreement (Nafta), Canada remains largely sovereign over most policy areas. But the reality is that, for many technical and business rules and standards, Canada follows the lead of the US, where it sells an overwhelming majority of its exports. In 2014, the EU accounted for 44.6% of UK exports of goods and services.

The LSE said: ‘Brexit would allow the UK to negotiate its own trade deals with non-EU countries. But as a small country, the UK would have less bargaining power than the EU. Canada’s trade deals with the United States show that losing this bargaining power could be costly for the UK.’

Relationships beyond the EU

What would be unchanged, of course, are British relationships with the International Accounting Standards Board (IASB) and the Organisation for Economic Co-operation and Development (OECD). As the UK has always been keen on IFRS, it would be unlikely to retreat to British financial reporting standards, regardless of its EU membership status. Similarly, the UK has always been a leading member of the OECD and hence it could be expected that the UK would implement legislation following the international think-tank’s BEPS proposals, which sparked the recent EU proposals. The UK might perhaps follow the BEPS line more tightly, ignoring gold-plating proposed by the European Commission (EC) regarding levying exit taxes on intellectual property or patents and taxing locally based multinational parents on any profits transferred to lower tax countries.

So there would be much uncertainty about UK tax policy following a Brexit. But the tax consequences of Britain remaining in the EU might be more predictable only in the short term. The EC is constantly pushing for more EU authority over the taxation policies of member states and a UK government following a pro-EU referendum vote might yield more tax sovereignty than before.

Take the EU’s proposed BEPS regulation and directive. It is hard to make a case for not taxing multinational corporations that shift their billions to low-tax jurisdictions. And while constitutionally the UK government can veto this legislation, politically it would be tough to justify outright opposition.

The consequence of a BEPS deal could stretch beyond this specific legislation. Every vote harmonising EU tax practices may make it harder to resist the next proposal, especially if European economies become more integrated. So more EU tax law, rather than less, could be expected in future. This could even – potentially – see the EU legislating on direct taxation.

Indeed, models on how such direct tax laws might work may be created soon through the EU’s ‘enhanced cooperation’ procedure, where a minimum of nine countries can pass legislation, enforced by the European Court of Justice (ECJ). This is being used to negotiate the EU’s proposed (and controversial) financial transaction tax directive, supported by 10 countries at an EU Council of Ministers meeting in December. While one party – Belgium – has recently objected to some details and final agreement has yet to be secured, it is clear that comprehensive EU direct taxation legislation could be approved soon.

Another key impact of a Brexit could be on employment law and especially the ability of accountants to move jobs and practices within the EU’s 27 remaining member states. At present, under the EU’s professional qualifications directive (2005/36/EC), while accountants wanting to work in different member states have to undergo top-up training in skills required by their destination country. ‘If the UK left, that wholesale recognition would be gone,’ says Nicholas Le Riche,
employment partner at law firm Bircham Dyson Bell. ‘We would have to work on a case-by-case basis, looking at each qualification and each country,’ he says. ‘The situation would become a lot more complex.’ 

Major accountancy firms and multinationals could struggle to move talented staff between their EU offices, he warns. Le Riche fears an ‘emotional reaction’ from the EU, with regulators in Britain’s former partners ‘suddenly making this recognition of qualifications as far as UK accountants are concerned a lot tougher’.

However, regarding other more general employment law issues such as working time, anti-discrimination protection and maternity/paternity leave, he does not foresee major changes following a Brexit, because most EU-required legislation is relatively uncontroversial. Maybe there could be wriggle room to reduce protections for agency workers required by EU legislation (the temporary agency work directive 2008/104/EC), and ECJ rulings on assessing overtime pay, he suggests. But even if Britain wanted to scrap major protections such as working-time laws, Le Riche suggests major EU players such as Germany and France would probably refuse Britain a post-Brexit EU free trade deal without the UK retaining the bulk of EU employment protections to prevent British firms having a cost advantage.

Tough competition

As for competition law issues, if Britain votes to leave and does not become a member of the EEA, UK competition law will apply for British companies; but as the EC’s competition powers will continue to apply in the rest of the EU, it would impact on British companies wanting to trade with remaining EU member states. Guy Lougher, partner for law firm Pinsent Masons and a competition law expert, stresses that broader competition law rulings made by the commission in the past might continue to apply in a Brexited UK, but only unilaterally or as part of a post-Brexit agreement. That said, even then such practices would be ‘reviewable under UK competition law’, says Lougher. If Britain joined the EEA, the commission would retain its power over mergers with impact on the UK and other EEA member countries.

With so many challenges created by a Brexit, especially for larger companies, it is perhaps unsurprising that a majority of UK companies, although not a consensus, seem behind remaining in the EU. A snap poll of members of the UK’s Institute of Directors following the announcement of a referendum date, indicated that 60% backed remaining in the EU. Only 31% supported a Brexit, with the remainder being ‘don’t knows’. Meanwhile, 80% of the CBI’s 190,000 members wish to remain in the EU, around 5% want to leave and the remainder are unsure; of those businesses that are SMEs, 71% want to maintain the status quo. 

In addition, a letter to The Times newspaper, signed by almost 200 business leaders – including budget airline easyJet, defence contractor BAE Systems, energy giant Shell, and pharma giants GSK and AstraZeneca – said the UK should remain in the EU: ‘Business needs unrestricted access to the European market of 500 million people in order to continue to grow, invest and create jobs. We believe that leaving the EU would deter investment and threaten jobs. It would put the economy at risk,’ said the letter.

The OECD in April released a report predicting that by 2020, a Brexited UK GDP would be at least 3% smaller than with continued EU membership, costing each British household £2,200 at today’s prices. By 2030, GDP would be more than 5% lower than if the UK retained EU membership, said the OECD, citing losses of trade with continental Europe and less inward investment.

Within the accounting sector, many representative organisations including ACCA have not taken a position. But no institution has come out in favour of a Brexit and there has been some outright opposition. Speaking to Accounting and Business, Olivier Boutellis-Taft, CEO of the Federation of European Accountants (FEE), warns that the Brexit debate had already caused damage by preoccupying EU institutions and undermining trust between governments. Commenting in a personal capacity, he also worries that the mutual recognition of UK and EU accounting qualifications would be lost following a Brexit. And he warns that any post-Brexit negotiations would be tough: ‘It’s not going to be pretty,’ he predicts. A Brexit could even undermine IFRS on the continent, he warns. Some politicians in the remaining member states could cool on further use of IFRS because the IASB is based in London, he suggests. Moreover, Britain brings an important free market perspective to EU political debates, which would be lost if the UK leaves the EU. ‘Everyone will lose,’ he says. 

Keith Nuthall, journalist