Profession tight lipped over Brexit stance

ACCOUNTANTS are starting to tangle with the knotty question of whether to support Britain remaining in or quitting the European Union (EU) after the scheduled in-out referendum on June 23. While many UK captains of industry and business have publicly called for Britain to stay in, citing the advantages of freely accessing the EU’s 503 million person market and its trained labour pool, the question for accountants is not that simple.

The reality, as indicated by a new ICAEW report on the ‘Brexit’ issue, is that only 5% export of British small firms (all potential clients of course) export to the EU, rising to 41% for firms with more than 250 employees. Because small firms are more common, just 7% of British businesses export to EU member states. For the accountancy sector, the EU is maybe even less important – the share of revenue generated by clients in other EU countries is just 4.2%. Of course, if Britain votes to leave, sterling tanks and key major companies and banks relocate from London to Frankfurt – this will mean a lot less money for accounting firms, but there may be a recovery later. What is, however, less clear, is what advantages a Brexited Britain could offer its businesses, economy and its accountants rather than a UK that remains united with the EU.

Accountants deal with facts and like to present analysis to decision-makers rather than making key policy choices themselves. So it is maybe not surprising that key British accounting associations have largely shied away from taking an overt stance over this critical referendum question. The ICAEW council has now decided that this key membership organisation will be neutral. The same has applied at the ACCA. They and a range of accounting bodies have said the most they will do is present detailed analysis of the impact of staying in or quitting the EU.

In March last year, ICAS found 82% of members wanted to remain in the EU, although these were split between accountants who wanted more EU integration, others wanting the status quo and some wanting the UK government to renegotiate a looser relationship.

ICAS is to release a new paper assessing the issue on April 18 and will stage another opinion survey, whose results will be reported, but David Wood, ICAS’ executive director of technical policy and practice says the institute will stop short of taking a position. “We’ve had some experience in the Scottish independence referendum. We feel that these are decisions for individuals to decide. We feel we have an obligation to inform the debate and report the survey. If we took a stance, it would undermine the credibility of our commentary,” he says.

CIMA has however adopted a clear, pro-remain position – with an opinion survey showing 76% want to stay; while only 7% thought that leaving the EU would have a positive impact on their own business.

Tony Manwaring, CIMA executive director, external affairs, said: “The role of management accountants is to assess all relevant information to decide what will best ensure the success of business now and in the future. On this basis, they have said that the UK’s membership of the EU is good for the UK.”

The tax implications of leaving the EU

But is this right, at least in taxation terms? Short of a damaging flight of capital and business from London if there is a Brexit, accountants will probably be focused on the potential tax implications of Britain quitting the EU. While taxation has remained a policy area over which EU member states retain close control (most EU legislation requires unanimity among all member states sitting on the EU Council of Ministers), there is of course plenty of tax legislation on the EU statute book (called the ‘acquis communautaire’). This includes the EU VAT directive, which insists that standard VAT rates must be at least 15% and reduced rates be at least 5% (for supplies of goods and services referred to in an exhaustive list). There is also a range of laws limiting the range of EU excise duties. And of course there is the EU accounting regulation insisting on the use of international financial reporting standards in the EU.

If there is a Brexit, EU laws on direct and indirect taxation will cease to apply within the UK, and Britain would regain the right to vary its VAT and excise duty rates beyond the restrictions imposed by EU legislation.

But if the UK decided to request and was granted membership of the European Economic Area (EEA), the accounting directive would continue to be applied. The EEA is a halfway house membership used by Norway, Iceland and Liechtenstein, that extends significant elements of EU law to these countries, without them having a say in how this legislation is drafted.

Another option for Britain would be following the Swiss route, being a member of the European Free Trade Association (EFTA), but without being part of the EEA. This would mean the UK would have to negotiate bilateral trade agreements with the EU, which may include adopting EU rules on tax and financial reporting – but there would be no guarantees of agreement post-Brexit.

What would be unchanged of course is British relationships with the IASB and the Organisation for Economic Cooperation & Development (OECD), which lay outside the EU. As the UK has always been a keen proponent of IFRS, it would be unlikely that there would be any retreat to British accounting standards, regardless of its EU membership status. Similarly, Britain 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 (Base Erosion and Profit Shifting) proposals, which have sparked recent EU proposed legislation.

What perhaps could be expected though is for Britain to follow the BEPS line more tightly, and ignore the gold-plating proposed by the EC regarding levying exit taxes on intellectual property or patents moved to a low tax jurisdiction and assuming the power to tax locally-based multinational parents on any profits these companies transfer to lower tax countries, where the effective difference between tax rates exceeds 40%.

The tax implications of staying put

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 the envelope to secure more EU authority over the taxation policies of member states, and a UK government with a pro-EU referendum vote in its back pocket might yield more tax sovereignty than thus far.

The EU’s proposed BEPS regulation and directive are a case in point. It is hard to make a case for not taxing multinational corporations who shift their billions to low tax jurisdictions. And while constitutionally, the UK government has a veto over the shape of 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 a future EU. This could even – potentially – see the EU legislating on direct taxation – the Holy Grail of EU governments determined to protect their tax sovereignty from Brussels.

And the 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 EU countries can pass EU legislation, enforced by the European Court of Justice (ECJ), without other EU countries being involved.

This is being used to negotiate the EU’s proposed (and controversial) financial transaction tax directive, which was supported by ten countries at an EU Council of Ministers meeting in December. While one party – Belgium – has recently objected to some of the details, and final agreement has yet to be secured, it is clear comprehensive EU direct taxation legislation could be approved soon, available for adoption by any other EU country, whenever it wanted to sign up.

So while the UK would retain its veto over taxation laws for all 28 member states if it remains in the EU, its political ability to block EU tax legislation may shrink going forward.