Brexit – Render to Caesar

Some years ago I used this quote only to be brought up short by my former business partner, Tony Borman, who knows his bible, and he asked me to read that part in full. I’m not a religious man, but I was intrigued by the text: –

“And they sent to him some of the Pharisees and some of the Herodians, to trap him in his talk. And they came and said to him, “Teacher, we know that you are true and do not care about anyone’s opinion. For you are not swayed by appearances, but truly teach the way of God. Is it lawful to pay taxes to Caesar, or not? Should we pay them, or should we not?” But, knowing their hypocrisy, he said to them, “Why put me to the test? Bring me a denarius and let me look at it.” And they brought one. And he said to them, “Whose likeness and inscription is this?” They said to him, “Caesar’s.” Jesus said to them, “Render to Caesar the things that are Caesar’s, and to God the things that are God’s.” And they marvelled at him.”

So even within a religious context, there is an obligation to pay taxes according to the law, but no more – which is of course a principle we can all agree with.

And since taxation began, there has been a mechanism to collect taxes, even if it was at times at the point of a sword.

Mutual Assistance Legislation

One important mechanism to collect taxes cross border is the Mutual Assistance legislation.

You may well wonder what this is, and unless it is has been used on your business, it is quite reasonable to never have heard of it. This is legislation within each EU Member State requiring that Member State to collect tax on behalf of another Member State.

So, for example, a German company which should have paid tax in the UK, say on construction activities, does not do so leaving the UK (HMRC) to contact the German tax office for them to collect the tax on behalf of the UK. Or a UK company trading in France fails to pay its taxes, and the French Government can require the UK (HMRC) to collect the tax on behalf of the French.

You may be horrified at this intrusion, but if you think about it, in the UK get annoyed enough about foreign drivers not paying their parking fines, so why not ensure that your taxes are collected – after all, every £ or € of tax not collected is a £ or € more for other taxpayers to pay.

So what is the problem?

At the moment, the UK is aiming to leave the Single Market and, as explained in a previous article, this could result in more EU businesses having to register for VAT, and pay VAT in the UK, as well as more UK businesses having to have VAT registrations in other member states, and pay tax in each of those countries.

Whilst most businesses will play by the rules, and render unto Caesar the things that are Caesar’s, some won’t, either deliberately or through ignorance. The natural recourse is then to fall back on the Mutual Assistance legislation, but that legislation is likely to go when the UK leaves the Single Market.

So just when a country really needs the Mutual Assistance legislation, it will no longer be available.

So where do I think this will go?

I think it is going to be an important political football within Brexit. Why?

Simple, it is about which Government gets to collect the tax money – or not as the case may be. It could result in agreements being made between the major economies as that’s where the bulk of the money will be. But the smaller countries could well object to that. Hence it could take some time to be resolved.

The usual solution as far as the EU is concerned is to have an interim or transitional period. Frequently these transitional periods become the permanent solution, as we saw in VAT following the completion of the Single Market in 1992 – i.e. it didn’t get completed and the pretence of the transitional period was dropped many years later.

The problem from the UK perspective is that our Government has indicated it would resist a transitional period – that said, there’s an awful lot of water to go under the bridge until 31 March 2019.

So, who will be Caesar after 31 March 2019?

So, right now, on tax, we know that all the existing EU rules will drop away, and will need to be replaced with something else, and we also know that even if that is resolved, the ability to collect tax from businesses in another Member State is also at risk.

Do I think all of this will be resolved by 31 March 2019? No I do not.

Do I think that there will be a transitional agreement? Yes I do, but not necessarily on all issues.

In the meantime, businesses need to plan on who Caesar will be from 1 April 2019. And right now, it seems even the parties to the negotiations do not know. This is not helpful for business.

Steve Botham