Brexit debate: No fun in seeing Britain become the next Greenland

“Voting for Brexit would be a bit like letting the animals out of the zoo. You know you shouldn’t do it, but it would be fun to see what happens. Imagine seeing a lion in Aldi”.

Such was the observation of a contributor to BBC 4 the other week, and I understand where he was coming from. 

The Brexit debate — whether the UK should remain in the EU or exit from it — has rumbled on so long that people are getting bored, and voter boredom makes for unpredictable results.

Almost everything to do with the possible departure of the UK from the EU is unpredictable. 

The only country which has ever left the EU before was Greenland, but Greenland’s departure from the EU does not offer much precedent value compared to the impact of the second largest economy in the Union leaving the trading bloc. 

There are all kinds of claims about what might or might not happen post-Brexit, if that is the outcome of the decision by UK voters on June 23. 

While many of the consequences are, indeed, uncertain, the position in relation to taxation is clear-cut and mainly to do with the internal taxation issues for the UK itself. 

Vat is completely a European tax, so the British would have free rein to make whatever changes to their Vat system they wished, without any hindrance from the EU.

Other taxes follow some of the constraints of the EU treaties, and so again there would be scope for changes not currently permitted such as special tax rates for different industries.

Many of us might feel that the UK decision to stay or leave the EU will be of little practical consequence. 

But from an Irish perspective, post-Brexit changes to the tax regime on the imports and exports between ourselves and Great Britain will undoubtedly affect us. 

There are customs duties and tariffs, levied on certain products traded between nations. 

Consumers also pay Vat which is applied by the businesses when they buy goods and services.

Being part of the EU means being part of a customs union and a freetrade area. In essence, this means that no EU country can impose tariffs on another country’s exports to favour their own domestic economies, and all EU countries apply the same tariffs to products coming in from outside the EU.

So, for example, the British cannot levy tariffs on Irish food exports, in the same way as we cannot levy tariffs on their food exports, but both our countries must levy the same tariffs on food from countries like the US or China which are not EU members. 

If Britain decides to leave the EU, these favourable tariff arrangements between our countries will cease. Many items — such as clothing — which we import from the UK will become more expensive.

That’s a problem for UK exporters, but it is also a challenge for Irish importers.

The other headache for Irish importers following Brexit is a change to the Vat regime. 

Vat applies to goods and services, and traders must account for it. 

But Vat payments by traders on imports from EU countries are deferred compared to Vat payments on imports from non-EU countries. 

Because of this Vat position and all else being equal, it is cheaper for importers to import items from EU countries that from non-EU countries (which is the whole purpose of this rule in the first place).

These Vat and customs duty changes aren’t optional should Britain decide to leave the EU. 

They must happen unless the British can put alternative arrangements in place. 

Alternatives to EU membership already exist, for example those enjoyed by Norway under an arrangement known as the European Economic Area. 

The Swiss have customs benefits within a grouping called the European Free Trade Association.

Of course, every difficulty provides its own opportunities and it is possible that any new agreements brokered between our two nations — post-Brexit — might well suit our exporters and importers even better than the current EU position. 

There are already favourable income and capital tax terms which are independent of the EU Treaty for businesses with operations on both sides of the border and the Irish Sea. 

These favourable terms should be extended to the customs and Vat issues which arise in cross-border imports and exports. 

The caveat here is that Ireland could be restricted in what we can negotiate with the British because of our own membership of the EU.

The follow-on if Britain leaves the EU will be interesting. There is, however, no guarantee that it will be fun.

Brian Keegan is director of taxation with Chartered Accountants Ireland

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