The debate on a British exit from the European Union is deep-rooted in sovereignty. It is about the control the UK has over its own laws and regulations, who it admits into the country and who it doesn't, what it allows businesses to do and what it doesn't.

From the time of the Boston tea party the issue of taxing rights and government recognition have been inseparably linked. Bostonians destroyed merchandise rather than pay import duties to what they saw as a foreign power. Tax is an imposition, a fact that elected governments do well not to overlook when running for election. It’s relevant in referendums as well.

European rules have a lot to do with tax but not as much as you might think despite the claims of the leave campaign. It is easy for commentators to focus on controversial areas such as VAT on Cornish pasties and decry these as further examples of European bureaucratic blindness. It may be more helpful to consider what Brexit might mean overall for the UK tax system. To do that it's necessary to first of all look at what leaving the European Union might do for Britain's own taxes, and then secondly to look at the tax effects of Brexit in terms of how Britain trades with other countries.

VAT

It is a condition of joining the European Union that a country must have a VAT system in place. VAT is really the only European tax of widespread application that impacts on people’s day-to-day lives. Each member country has to transpose the letter of European VAT law directly into its own national law. UK VAT law is European law sprayed red, white and blue. The idea is that the European common market in goods and services doesn’t become distorted because different countries have different VAT rules in place. No country can have anything other than slight variations on what is subject to VAT and there are also limits on the VAT rates which may be set.

Therefore if the UK was to leave the European Union it could in theory abolish VAT but that is not going to happen.

The post-Brexit position within the UK of the other taxes – income tax, corporation tax, capital gains tax and the like is a bit more nuanced. There are very few EU rules which directly affect any of these taxes. However, there are principles in the European treaties which mean that to some extent at least, the rules which must apply to all these taxes are circumscribed.

European law insists on the so-called four freedoms – the freedom of capital, people, services and businesses to operate across borders without hindrance. In practical terms this means that the UK cannot charge a higher rate of income tax on other EU citizens than it does on its own citizens. It means that the UK cannot charge a French-owned company a higher rate of corporation tax than it does it on a British-owned company – such measures would constitute infringements on the EU freedoms. Just as important, the French could in theory charge UK companies more corporation tax when operating in France post-Brexit than they might charge similar French firms.

Double-edged sword

Freedoms are a double-edged sword. Restrictions on the free movement of individuals was a major component of the Brexit deal struck by prime minister David Cameron, but on leaving the EU, UK businesses will find they have less tax latitude when trading in Europe.

The other EU legal principle that circumscribes tax law is the notion of state aid. In so far as it affects tax, state aid means that the tax system cannot favour a company, sector or geographical area over others. We have seen the practical application of state aid rules in the context of the Northern Ireland Executive being granted devolved powers to reduce the corporation tax rate. The granting of those powers in Northern Ireland cannot be made without some countervailing cost to the province, in this case a reduction in the block grant of financial support. Without European state aid rules, Westminster could grant special tax rules as it wishes – reduced corporation tax rates for the northeast or income tax exemptions for Welshmen.

Tax Abroad

It is however when we look at the tax position of businesses from the UK trading in Europe that the more serious tax implications of a British exit kick in. The membership of the European Union guarantees favourable customs rates. No EU member state can charge another EU member state higher duties. However if an EU country is importing from outside of the EU, all bets are off. If Britain leaves the union, it becomes a foreign exporter as far as the EU is concerned.

The border with Northern Ireland would be far more apparent and could well involve a customs post, additional customs controls, additional border controls and everything that goes with that.

The VAT position is a bit less potentially damaging, but of consequence nonetheless. In broad terms, when goods are imported from one EU country into another, VAT always has to be paid. However, the importer only pays the VAT on the imported goods once they are sold on to the importer’s own customers. Post-Brexit, if something is imported from the UK, VAT would have to be paid by the importer up front. In markets with already tight margins, this cash flow disadvantage could mean all the difference between importers selecting UK products and importers selecting products from other EU countries.

Due to the tax offsetting rules in the EU treaties, any business with a branch or subsidiary in another EU country can be reasonably sure that the same profits will not be taxed twice. Without these umbrella arrangements, cross-border payments to businesses in countries outside of the EU are subject to bilateral agreements called tax treaties between the countries concerned. As regards Ireland there would be very little if any change in this area because individual tax treaties we have with the UK by and large ensure that income which could be taxable in both countries only gets taxed in one of them. The position for the UK relative to other EU member states is not nearly as cut and dried.

Negotiating

If Britain does decide to leave the EU, it’s going to have to do a lot of negotiating to arrive at the same tax status for its businesses operating abroad as currently prevail. The UK is a G-7 country, so all else being equal, most other countries will want to continue dealing with it in the same tax terms that they currently enjoy. But without the umbrella of the EU treaty structures, the UK would have its work cut out in arranging bilateral deals with other territories essentially to restore the tax position that would be surrendered by leaving the EU. Establishing new bilateral arrangements is not of course impossible, but it will take time. Once a country decides to leave the EU, it must do so within 24 months, and 24 months is not a lot of time to conclude international trade negotiations.

One possible avenue of approach to fast-track customs negotiations might be for the UK to seek to rejoin the European Free Trade Association (EFTA). EFTA currently includes Norway, Switzerland, Iceland and Liechtenstein. The UK was one of the founder members of the EFTA, and left for a better deal in what was then the European Economic Community in 1973. There is also a European Economic Area including Norway and Iceland which grants many of the EU treaty protections at the cost of demanding fulfilment of many of the EU treaty obligations.

If evaluating Brexit solely in tax terms, the UK would be leaving one trading bloc to find itself immediately seeking to join other trading blocs if it wished to preserve favourable import and export tariffs and cross-border tax arrangements for its businesses and citizens. There may well be excellent reasons for the UK to leave the EU, but it seems that tax reasons are not numbered among them.

Brian Keegan is Director of Taxation at Chartered Accountants Ireland