To thine own seat be true

Mar 26, 2018
Sunday Business Post, 25 March 2018
£600 billion is a colossal amount of taxation.

Nevertheless, according to a Whitehall briefing I attended the other week, that is how much the UK revenue authority proposes to collect in the year to 5 April 2018.

It's an amount which reflects the size of the UK economy.  That size makes it all the harder to understand why the UK seems to have capitulated so easily to the terms of the EU's draft Brexit withdrawal agreement, originally published at the end of February.

Just three weeks ago UK Cabinet ministers were rejecting the EU proposals out of hand.  British PM Theresa May herself claimed that the withdrawal agreement would have to be rewritten.  So what has happened to make the UK establishment so acquiescent to the latest round of EU demands? 

The Extension Agreement

Let’s go back to basics and remind ourselves of what exactly is at issue.  The Brexit withdrawal agreement is in some respects a misnomer.  What the agreement actually does is provide breathing space for revised arrangements between the UK and the EU to be put in place after the U.K.'s scheduled departure date from the EU of 29 March 2019.  It would be better to call it an EU membership extension agreement. 

Under the terms of the agreement, the benefits of EU membership will continue to be extended to the UK until 31 December 2020 – some 21 months after the original scheduled departure date.  Over the course of that extended period of time, the UK will continue to pay into EU budgets and projects, acquiesce to EU laws and regulations, yet have no political say over the vast majority of decisions been taken. 

It's quite an incredible position for such a dominant country, a member of the G7, to be in.  Some commentators, from prominent Brexiter Jacob Rees-Mogg to prominent Bremainer Nick Clegg, were united in their assessment that the UK is becoming a vassal state.  Yet the British establishment has stayed noticeably stumm on this new deal. 

Bullish and Unsympathetic

Perhaps this is because of concern over business interests?  If so, that concern is new-found.  Two of its largest business groups, the Confederation of British Industry and the British Chambers of Commerce, have long insisted on the need for a transition period.  This is to allow businesses prepare for the additional costs associated with importing and exporting when the UK loses its member benefits of the Single Market and the Customs Union.  Leaving the Customs Union hampers the free movement of goods across borders, and leaving the single market eliminates automatic recognition across Europe of UK goods and services, especially financial services.  Up to now the political establishment has been remarkably bullish and unsympathetic towards these predictions.  Has there been a sudden change of heart?

Or is it perhaps that the recent sabre rattling from the US about putting tariffs on metal imports has brought home a new realisation. The much vaunted new trade deals which the UK will be in a position to negotiate post Brexit might not be as accessible as previously thought.  Is it better to dance with the devil you know for a little while yet?

It probably is, if you need to collect £600 billion in tax.  A government that can collect that amount of tax this year needs to collect that amount of tax next year and the year after to meet public spending expectations.  If it doesn’t, it must pursue austerity.

Keeping it rosy

Even if, post Brexit, everything remains rosy and industry and employment levels can generate the profits and income, the cash flows associated with these vast amounts of money must be managed.  A hard Brexit would disrupt the big revenue raisers like VAT and excise.  Those responsible for the finances of the UK must be wondering not just about how much tax will be collected, but about where and when it will be collected.  As any accountant will tell you, adverse cash flow will kill off a business much faster than losses. 

I’m inclined to think that the movement in the British position is not quite as dramatic as the dispatches would suggest.  Media coverage of what is still clearly not agreed between the EU and the UK has largely focused on the Northern Ireland situation, and with some justification.  But there is also apparently no agreement on arbitration mechanisms to resolve any future disputes between the parties. 

Loss of face

That fact, coupled with EU negotiator Barnier's repeated assertion that in any event nothing is agreed until everything is agreed, may suggest that the UK has perhaps not been quite as acquiescent to the EU view of matters as we might have thought.  But the UK has bought itself some time to get its own affairs in order in exchange for some political loss of face.

What this version of the withdrawal agreement may signal is that for the first time the mandarins in Whitehall are winning the backroom debates.  They may be pointing out to their ministers that while taking back control is all very well, being in control when all anyone sees is chaos is the kind of thing that can lose elections. 

If there has been one constant since the Brexit vote was first mooted by former UK PM David Cameron, it has been how wedded politicians are to their future electoral prospects.  Maybe light is now beginning to dawn that a bad Brexit could be bad for your seat.

Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland