Partner Article

EU recommends UK tax changes

Tax will be a major talking point at this week’s European Council and, while we can expect consensus on measures to fight tax avoidance (e.g. hybrid loan arrangements), the rather innocuous-sounding ‘European Semester’ agenda item could cause the PM more discomfort than the identity of the next President.

Under the European Semester, the European Council will exchange views on actions to be taken at national level, and endorse country-specific recommendations to guide Member States in their structural reforms, employment policies and national budgets.

The Council has made six recommendations specifically aimed at the UK and, if endorsed, will have a huge impact on the UK public. Three relate to tax and benefits.

Among the recommendations is that the UK should broaden its tax base. In simple terms, the UK should remove its VAT zero-rates and apply VAT to those goods such as food, books, children’s clothing, new housing, drugs and aids for the handicapped. By introducing a reduced VAT rate to these items, the Council consider that such a policy choice “would minimise any inflationary effects of an immediate move to the standard VAT rate, as well as lessen the impact on the most vulnerable in society”.

Another recommendation is that, to alleviate distortions in the housing market, the UK should reform the taxation of land and property. The UK therefore needs to update the property value roll (last updated in 1991); the Council considers that such a move is necessary as, in relative terms, the regressive nature of current rates and bands mean taxes on higher value property are lower than on lower value property. In other words, we can expect a substantial increase in council tax(1).

There’s also a ‘dig’ at Universal Credits noting that, although Universal Credits could have a positive impact on employment, much will depend on effective implementation and support services, including the interaction with other benefits.

Mr Cameron and his aides will be quick to point out that these ‘are only recommendations’, and that such ‘interference’ illustrates why the choice of the EU Presidency is of such importance to protect the UK’s fiscal autonomy. A valid point, but the recommendations were last week endorsed by ECOFIN, where the UK was represented by the Financial Secretary to the Treasury. Such UK endorsement would seemingly undermine the PM’s negotiating position at the European Council.

One thing’s for sure, this week’s Council meeting will certainly be lively.

(1) Council tax and business rates systems are devolved to the Scottish Parliament and the current Scottish Government has fully funded a council tax freeze for the last six years and frozen the tax at 2007/08 levels.

David Wilson is VAT Associate Director at Baker Tilly

This was posted in Bdaily's Members' News section by Baker Tilly .