The Year ends in March

Nov 06, 2017

Sunday Business Post, 5 November 2017
This week I found myself at a reception organised for South African accountants working in London.  About 60 people attended to hear about new South African tax rules which would cost their expatriates a lot of money; new rules which parallel the arrangements in place here that stop people avoiding Irish tax liabilities simply by leaving the country.  Almost all of the people I met were working in financial services in the city of London.  And most of them were looking to get out.  Because of Brexit the future for an expatriate working in financial services in London doesn’t look quite as rosy as it used.

This isn’t a constituency you’d immediately associate with being affected by Brexit.  Nevertheless, whether they felt they would have to move because their employers required them to, or because they feared for the future stability of their employment after the UK leaves the European Union, the talk was of relocation back home.  Or of moving to Frankfurt or to Luxembourg or to Dublin (though I suspect the latter was only being politely name checked when I was in earshot).

It is dangerous to extrapolate too much from the evidence of a small sample, but to me the discussions were indicative of how deaf the political debate on Brexit has been to its impact on people from all walks of life.  Businesses too are trying to plan for the changes and many are frustrated.  Seven months after the formal notification of intent was made to depart, we are not much further on in understanding what the future trading landscape will be. 

Customs Controls

Customs controls for importers and exporters are of course only one aspect of the Brexit dilemma, but are arguably among the most high-profile, and therefore, along with the free movement of people, the most politically charged.  The practicalities of trade are routinely blended together with the politics of border controls.  The Irish government’s challenge to the UK on customs borders – you broke it so you can fix it – may well be a politically appropriate response, but it’s useless to business.

Customs border controls are primarily needed for economic reasons.  The essence of a customs union (which the UK tells us it is leaving) is that the countries within the union must have a fortress-like mentality towards countries outside of the union.  The borders of the entire EU customs union, which will continue to include Ireland, must be sealed.  Trade in goods between the customs union members is tariff free, but that trading privilege can only work if there are no tariff free goods coming in to the EU from countries outside the Customs union. 

A future arrangement between the UK and say a far Eastern trading partner country like China (as nothing more than a random example) could result in no customs controls on some goods moving from China to the UK.  But if the EU didn’t operate controls between itself and the UK in the future, there is nothing to prevent those Chinese goods coming into the EU via the UK with neither UK nor EU duty being paid.  Whatever any politicians in Dublin or London might think, the other 26 EU member states will not permit the integrity of the customs union to be jeopardised by a porous border between Ireland and the UK.

An Autonomous Territory?

A former EU Commissioner and former head of the World Trade Organisation, Pascal Lamy, suggested in Dublin last week that Northern Ireland could be treated as an autonomous customs territory.  That could provide a legitimate and workable mechanism for having no customs controls between Northern Ireland and the South, and thus no border controls of any type.  Workable that is until the politics are factored in, because such an arrangement would in effect shift the Customs border between the UK and Ireland into the Irish Sea.  The suggestion deserved attention because up to now ideas for border solutions have been politically feasible (frictionless borders and the like) but lacking from a customs union perspective.  The Lamy idea seems the other way around; sound from a customs perspective but perhaps politically unrealistic.

A new impetus to arrive at Brexit solutions may be developing in Whitehall for the most banal of reasons.  The UK financial year does not run from January to December but from April to March.  By accident or design, the triggering of Article 50 on 29 March 2017 has resulted in the Brexit departure date coinciding with the end of the tax and financial cycle within the U.K.’s national Budget process.  The mandarins will need to be able to forecast tax revenues and expenditure with some degree of accuracy.  That will require more detailed and more nuanced policy decisions than the blunt statements of intent to leave the customs union and single market. 

A key date could be 22 November next.  This is the date of the next UK Budget, and the first since the Article 50 countdown clock started.  The announcements by the UK Chancellor Philip Hammond on that day might well reveal what the UK government actually expects its future customs borders and trading relationships to look like.  The nature of Brexit, hard or soft, with a transition or an abrupt break might not be driven by political posturing and EU resolutions and deadlines, but by the need for the UK to balance its own books.  Whatever about being deaf to the impact of Brexit on particular cohorts of people, the UK government must surely recognise that the national show must be kept on the road.

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