What changes will the government make if a deal isn’t made?

What changes will the government make if a deal isn’t made?

Insights have been provided by Brian Palmer, a tax policy adviser for the Association of Accounting Technicians

Brexit is edging closer and closer and, as a deal has yet to be agreed upon, it is entirely possible that we will be leaving the European Union without a deal.

“Changes that could happen [include] capital allowances, personal allowances, and income tax, as well as sweeping changes to tariffs and a short-term cut in VAT.”

If this is indeed the case, then UK businesses face a rocky road ahead; the way needs to be smoothed out through stabilising policies and unity in government. Considering the current happenings in parliament, this is perhaps too tall an order.

The Association of Accounting Technicians (AAT) has revealed some of their predictions for changes the government will most likely make in the event of a no-deal Brexit.

Tax changes

“I believe that it’s safe to rule out a change to corporation tax, as it is already relatively low compared to other nations,” said Brian Palmer, tax policy adviser at AAT.

He continued: “Changes that could happen [include] capital allowances, personal allowances, and income tax, as well as sweeping changes to tariffs and a short-term cut in VAT.”

It is possible that changes could be made to capital allowances—thus helping businesses to purchase assets such as: energy saving boiler equipment, zero-emission goods vehicles, water saving equipment. They would do this by “allowing their full cost to be deducted from profits before tax generated during the year purchase,” AAT explained.

“To help individuals, government may decide to increase the personal tax allowance at about the rate of inflation, allowing taxpayers to keep more of the money they earn at work. This will ultimately feed into the real economy via a boost in consumer spending.”

In the event of a no-deal, it is entirely possible that “Fiscal Phil” could extend the scope for first year allowances through the introduction of new categories of expenditure, as well as increasing the eligible value of items.

Furthermore, AAT cited that the Annual Investment Allowance (AIA) rules could be widened. Currently, as of January 1 2019, the amount of qualifying expenditure is £1m; this could be raised further or simply extended.

The accounting body continued: “While, for the vast majority of businesses, an AIA threshold increase, or extension, will not have any impact, it is still likely to help buoy up sentiment and stimulate a positive investment backdrop.”

“It would not come as a total shock if chancellor Hammond repeated the action taken during the financial crisis of 2008, when the standard rate of VAT was lowered to 15% from 17.5%, for a little over 12 months,” Palmer mused.

“So, it seems likely that, after a no-deal Brexit, it could be lowered again from its current level of 20% to help stimulate UK demand.”

“In addition, reducing tariffs alone will not make UK borders as frictionless as possible—other measures will also be needed.”

Palmer added: “To help individuals, government may decide to increase the personal tax allowance at about the rate of inflation, allowing taxpayers to keep more of the money they earn at work. This will ultimately feed into the real economy via a boost in consumer spending.

“In the same vein, lowering the starting rate of income tax might be another option. Although, care should be taken to avoid creating even more distortion between a single wage-earning household to a relatively high single income, compared to a household with two lower incomes that, when combined, amount to the same as the former.

“For example, [this] occurred with the introduction of the High Income Child Benefit Charge, where a household with a single taxable income of £60k a year will have lost its entitlement to Child Benefit, but a household benefiting from two annual taxable incomes, both of £30k, will retain full entitlement.”

Changes to tariffs

AAT further predicted that the government could turn their attention to the situation of tariffs on imports at the UK border.

Going forward, the government will face the dilemma of choosing to impose tariffs (thus increasing prices for the consumers) or removing tariffs altogether (thus keeping goods cheap but risking the UK production business due to competition from cheaper imports).

“While it would be a positive in the short-term, cutting tariffs could prove problematic when the UK attempts to negotiate the new bilateral trade deals that will be necessary once we have left the EU.”

“If this is done, the government will still have to be careful to make sure it doesn’t fall foul of World Trade Organisation (WTO) rules on which tariffs can be applied to products,” Palmer warned.

Confirmation tariffs will be applied to food imports to protect British farmers, and tariffs will remain in place on cars to protect the UK manufacturing industry—despite the fact this could increase prices for the consumer. Conversely, around 90% of other products will have their import tariffs reduced to zero, AAT has claimed.

Palmer said: “In addition, reducing tariffs alone will not make UK borders as frictionless as possible—other measures will also be needed.”

The tax policy adviser stated: “While it would be a positive in the short-term, cutting tariffs could prove problematic when the UK attempts to negotiate the new bilateral trade deals that will be necessary once we have left the EU.”

How long will these changes take?

If there is indeed a no-deal Brexit, the government will have to make changes quickly and not rock the boat any more than necessary.

As AAT has pointed out, something like VAT can be changed virtually overnight, thus meaning it could be the first change to be made in the face of a no-deal.

Since Brexit is penciled in to occur just a matter of days before the end of the financial year, it would make sense that any changes made to tax could take full effect within those few days. However, one area of tax that would have to wait until the new tax year would be the likes of raising the personal allowance.

“As we get closer to Brexit, it remains to be seen how many of these measures will need to be enacted. What we can be sure of, though, is that the regulatory environment could look very different.”

Some other possible changes

There is the possibility that interest rates could be lowered for anything from 6 months to a year to help decrease the cost of borrowing, whilst potentially aiding an increase in spending.

This could also mean the restriction of austerity, as the government would begin to borrow and spend on infrastructure projects—this is one of the most effective ways to help boost a country’s economy.

“As we get closer to Brexit, it remains to be seen how many of these measures will need to be enacted. What we can be sure of, though, is that the regulatory environment could look very different,” Palmer concluded.

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