A simple tax tweak that could strengthen our negotiating hand

A simple tax tweak that could strengthen our negotiating hand

The Brexit debate to date has largely been characterised by an exasperating, uninformed sterility of discussion in the broadcast media and an apparent lack of innovative ideas emanating from the Government.

However, there is a simple alternative model for our future trade relationship which I set out here. It’s possible that the bright young things in DExEU haven’t even seen a VAT return, let alone completed one, yet my mundane, single-sided A4 form could be the card to restore the UK’s previously strong hand and regain the initiative in the forthcoming talks.

A Strong Hand for a New Deal

The Import Excess Tax (IET) model could be a game-changer as it would enable the UK to leave the EU, Customs Union and jurisdiction of the European Court of Justice completely whilst regaining control of our borders and retaining the benefits of a free trade agreement in all but name, yet be acceptable to the EU.

So far, the Government has played a very strong hand not as strongly as it could have done. When your opponents are praising your negotiating skills, it’s a sure sign that you are the ‘mark’. This simple model for post-Brexit UK-EU trade will reinforce Mrs May’s position, enabling her to take the initiative in forthcoming talks. This card should not be kept up her sleeve but confidently be laid face up on the table in full view of the EU dealer.

Import Excess Tax

The Government should unilaterally offer free-trade terms without any tariffs or duty on imports from the EU, in the expectation that the EU will reciprocate by offering the same terms, and without demanding billions of pounds for ‘access’. If it does not, the UK should not retaliate in kind but implement a new “Import Excess Tax” (IET) if the EU wants to impose tariffs and duty on UK exports to the EU. This will be permissible under WTO rules during the post-Brexit adjustment phase and is unlikely to be challenged by the EU.

IET would be payable only by the small minority of UK businesses whose imports from the EU exceed their exports to the EU. It would have the effect of imposing across-the-board reciprocal duties on imports from the EU without the associated complexity and bureaucracy of the many different tariffs and rates of duty that could be imposed on EU goods.

The rate of IET could be set by the Government to levy a sum equal to the aggregate total of duties imposed by the EU on UK goods. Revenue thus raised could be used to offset the impact on UK exporters of EU duties on their goods.

How it works

The standard VAT Return form currently records the value of exports (box 8, below) and imports (box 9) to and from the EU. From 29th March 2019, the post-Brexit form should have new boxes 10, 11 and 12. These new boxes would need only to be completed by businesses that either sell to or purchase from EU states.

In the example below, the value of the firm’s exports (box 8) is exceeded by the value of its imports (box 9) by £20,000 (box 10) for the period concerned. This ‘Import Excess’ would be taxed at the rate shown (box 11) and the amount payable entered in box 12.

Options for UK

According to ONS figures, the UK had an £82 billion trade deficit with the EU in 2016. To illustrate IET in principle, the assumed mean rate of duty payable in both UK and EU according to WTO rules is 5%.

The UK Government could set the IET rates according to policy, e.g.:

  • The ideal –  0% if the EU does not impose tariffs and duty on UK exports.
  • The carrot – a low rate of IET to recover only the duty paid on UK exports to the EU (e.g. £11.8 billion), which would be reimbursed to the UK exporters to maintain their competitiveness. This would appeal to EU importers of UK goods and EU exporters as it represents an effective 25% (approximately) reduction of tariffs and duty on EU exports. It would also minimise any inflationary impact of tariffs in UK.
  • The stick – a high rate equivalent to the notional value of duties payable on imports from the EU according to WTO tariffs (e.g. £15.9 billion) to reimburse UK exporters and generate additional revenue estimated here at £4.1 billion.

WTO Compliance

Upon termination of a trade agreement the parties would be permitted to deviate from WTO rules during an adjustment period that is not defined but could be 5-10 years. A new bilateral UK-EU agreement based on IET would neither affect third party states nor invite serious objection.

The IET policy grants tariff-free access to the UK market without discriminating against EU goods, therefore the EU is unlikely to baulk at an agreement, particularly under the ‘carrot’ option.

The corollary of granting tariff-free access to EU goods is permitting the UK to levy IET to reimburse exporters for EU duties paid on their goods. This does not give any advantage to UK exporters or constitute preferential treatment or subsidy if the UK is not charging duty on EU goods.

IET is a domestic tax applicable only to UK importers, regardless of the type of trade or industry or product and cannot be described as protectionist or directly discriminatory against imports from the EU.

IET is only payable by companies whose EU imports exceed their exports to the EU. Although it may be argued that this discriminates indirectly against EU goods, objection on these grounds is unlikely to gain traction provided IET revenue remains less than the revenue that would be raised if the UK imposed WTO tariffs on EU imports.

Customs Union

In any scenario in which the UK is outside the customs union but has a free trade deal with the EU, the EU will be concerned about tariff-free third nation goods being imported into the UK then exported on to the EU, thus bypassing the EU’s tariff wall. Mitigation of this problem will require unacceptably stringent, onerous and costly control of goods origin with enhanced Certificate of Origin procedures and other measures.

Under the IET model, UK membership of the EU Customs Union will be unnecessary and cease to be a contentious issue. The UK will be free to conclude trade agreements with other states and the EU will be able to maintain its tariff wall as all goods from UK will be subject to WTO tariffs.

Other IET policy benefits

  • In addition to its simplicity, ease of calculation and collection, this simple model for UK-EU trade post-Brexit would provide the Government with a mechanism for policy flexibility.
  • IET would require minimal expansion of HMRC systems and resources to administer.
  • The additional bureaucracy for importers would be barely perceptible so might assuage any resentment about the impact on their revenues as it is almost certainly preferable to administering WTO tariffs and paying duty.
  • The tax would encourage import substitution as firms seek UK suppliers, or increase their exports to the EU to minimise their IET liability. (Some IET payers might seek to reduce their liability by buying and exporting third party goods, or importing via a third party with a surplus of exports to the EU. Such avoidance would need to be pre-empted in legislation.)
  • As the UK’s trade deficit with the EU is approximately £82 billion, IET could also provide the Treasury with additional revenue as well as assisting UK exporters to remain competitive despite duty paid by EU customers on their goods.
  • The 25% reduced tariff offered under the “carrot” option (value ca. £4.1 billion p.a.) could be offered in lieu of the £40 billion “Danegeld” financial settlement.
  • This IET model would also simplify the perceived (but largely contrived) problem of goods crossing an open Irish land border.

What’s not to like?