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Election Ends British Brexit Battle

Kitty Miv, Editor
18 December, 2019

Well, the electoral dice in the United Kingdom have finally fallen, and whatever your feelings on the outcome of the recent contest, the significant majority handed to Prime Minister Boris Johnson by the electorate at least permits clarity with regard to the likely direction of travel over the coming months and years, both in relation to Brexit, and with regard to tax and economic policy.

The Conservative Party won an outright majority in elections held on December 12, 2019, securing 365 seats in the House of Commons, of a total of 650, with Labour taking or holding just 203. The Scottish National Party secured 80 percent of the seats being contested in Scotland, with a total of 48.

The result gives the Conservative Party a crucial parliamentary majority, which will empower Boris Johnson to deliver on his pledge to "get Brexit done."

So, for better or worse, having been obliged to sidestep the topic while the future direction of the United Kingdom was being debated (although as indicated by the results north of the border, there are those within the Union, most notably Scottish National Party leader, Nicola Sturgeon, who would argue that the debate in this area is far from over, although that is perhaps a column for another time...), it looks like the subject of Brexit and UK policy is now up for examination, and the period in the run-up to the eventual and final uncoupling of the UK and the EU looks set to be an interesting one.

Following the announcement of the election results, the Conservative Party has said it will use new "freedoms" from Brexit to set its own tax policies, including in the area of VAT.

In its pre-election manifesto, the Conservatives promised to not raise rates of income tax, VAT, or National Insurance. It also cancelled plans to lower the corporate tax rate from 19 percent to 17 percent from April 2020. The Government has however committed to lower the tax burden of business rates (the UK's commercial property tax), and increase the employment allowance tax relief for small businesses. Further, the research and development tax credit rate will be raised to 13 percent, and the Government intends to review the activities in scope.

It also reportedly intends to also raise the National Insurance threshold to GBP9,500 next year.

On tax enforcement, the Conservative Party committed to:

  • Double the maximum prison term to 14 years for individuals convicted of the most egregious examples of tax fraud;
  • Create a new, single anti-tax evasion unit within HM Revenue and Customs that will cover all duties and taxes;
  • "Consolidate" existing anti-evasion and avoidance measures and powers; and
  • Introduce a new package of anti-evasion measures, including measures "to end tax abuse in the construction sector, [to] crack down on illicit tobacco packaging", and "to avoid profit-shifting by multinational companies."

Finally, the Conservative Party stated that it would deliver on its pledge to introduce a unilateral digital services tax from April 2020.

Speaking ahead of the election, Boris Johnson had stressed his ongoing commitment to introducing the digital services tax, in line with many other countries throughout the world in recent years.

The Government intends to legislate for the DST to apply from April 2020. Plans to introduce the levy were confirmed in the 2019 Budget.

It has been proposed that the tax will apply to revenue generated by search engines, social media platforms, and online marketplaces, to revenues from those activities that are linked to the participation of UK users. It will apply only to groups that generate global revenues from in-scope business activities in excess of GBP500m (USD659m) per year. Businesses will not have to pay tax on their first GBP25m of UK taxable revenues.

The regime will include a safe harbor provision that will exempt loss-making businesses as well as provisions that will reduce the effective rate of tax on businesses with very low profit margins. It is proposed that the tax will be deductible against UK corporation tax under existing principles, but it will not be creditable.

Speaking on the campaign trail, Johnson was quoted by the BBC as stating that: "On the digital services tax, I do think we need to look at the operation of the big digital companies and the huge revenues they have in this country and the amount of tax that they pay. We need to sort that out. They need to make a fairer contribution."

His comments came amid proposed action from the United States that would penalize France for introducing its own digital services tax. The United States considers that digital services taxes, such as the UK's, will disproportionately impact US multinationals.

The United States Trade Representative recently announced a consultation on possible retaliatory tariffs on French imports in response to France's DST.

According to a notice issued by the USTR on December 2, 2019, additional duties of up to 100 percent could be imposed on certain French products, in addition to fees or restrictions on French services. The list of French products subject to potential duties includes 63 tariff subheadings with an approximate trade value of USD2.4bn.

At the time, US Trade Representative Robert Lighthizer also said that his department is considering whether to open investigations into the digital services taxes to be introduced in Austria, Italy, and Turkey.

Until next time!

About the Author

Kitty Miv, Editor

Kitty was born in Argentina in 1960 to a Scottish cattle rancher and his Argentine wife. Educated in Edinburgh and at Princeton, Kitty worked for the World Bank as an economist, where she met and married an emigre Iranian banker. During her time with the Bank, Kitty worked in a number of emerging markets, including a spell in the ex-USSR as a Transition Economies Team Leader. Kitty is now a consultant in Brussels and has free-lance writing relationships with a number of prominent economic publications. kitty@lowtax.net


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