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The effect of Brexit on business - the 2018 Tax Faculty Hardman Lecture

Ian Young of the Tax Faculty reports on 2018’s Hardman Lecture, given by Jill Rutter, programme director at the Institute for Government and in charge of its Brexit work. The event was chaired by Mary Monfries, chairman of the Tax Faculty and explored the effect of Brexit on business.

The 2018 Tax Faculty Hardman LectureThe 2018 Tax Faculty Hardman Lecture was given by Jill Rutter, programme director at the Institute for Government and in charge of its Brexit work.

The lecture and dinner that follows honour the memory of Philip Hardman, a founder member of the Tax Faculty and a leading light in the tax world, who died in 1993.

This year’s 26th Hardman event was on 15 November and was, as usual, well attended. The invited audience in Chartered Accountants’ Hall included Tax Faculty and ICAEW members and volunteers, others from across the tax profession, and representatives of government. The event was chaired by Mary Monfries, chairman of the Tax Faculty.

The Hardman Lecture this year took place the day after the UK government published the 585-page EU Withdrawal Agreement and the seven-page outline of the Political Declaration. That morning, the Brexit secretary, Dominic Raab, resigned and the political process was plunged into chaos. At the time of the event we were looking ahead to a meeting of EU leaders on Sunday 25 November to agree to the terms of the agreement and set the course for the future relationship between the UK and the EU.

In this febrile and turbulent atmosphere, Jill sought to provide some clarity on where we have got to, the processes involved and the potential implications for business. This report covers the main themes she discussed.

Why have the Brexit process and negotiations been so difficult?

Negotiations of this complexity, involving a potential trade agreement, would normally take as long as 10 years. In this case the Article 50 arrangements allow only a two-year period unless everyone agrees to a longer period: this has been the basis for the extended implementation period to the end of 2020 rather than the end of March 2019, two years after the UK government triggered the Article 50 process in March 2017.

Most partnership negotiations are about closer arrangements, whereas in this case it has been about separation but with minimum disruption to commercial relations.

The UK cabinet has been a mix of remainers and leavers. The prime minister, Theresa May, was a remainer during the course of the referendum campaign in 2016 and became an over compensatory leaver as prime minister to ensure that she could be seen as clearly reflecting the will of the people to leave, as evidenced by the referendum vote of 23 June 2016.

The British have less experience of the workings of Europe in recent times. For instance, the Conservatives withdrew from the main European Parliamentary grouping, the European People’s Party, in 2009. The UK did not have enough familiarity with the ways of Europe and the people with whom it was negotiating.

A sensible interpretation of the Brexit decision is that it was a decision to put politics, or at least other issues such as identity, community sovereignty and control, above prosperity and the economic good of the country as a whole.

It is very difficult for the civil service to work out how to deal with such a challenge. There is also a huge challenge for representative government and representative democracy when both government and parliament are required to implement a policy that most of them did not support. They have to accept that they gave the people a choice and they have to reflect that choice in the policies and the decisions that they seek to put in place and implement. But for most of government and parliament, Brexit is an exercise in damage limitation.

Delivering Brexit vs EU membership benefits

The impossible conundrum has been how to deliver the “benefits of Brexit” while at the same time retaining the benefits of EU membership. There has been a refusal by both main political parties to confront the choice and the trade-offs. It was not going to be possible to enjoy the benefits of the single market and the customs union without the obligations, not least freedom of movement of people.

How we got here and what comes next

Jill gave a recap on how we had got to the current situation.

In the Conservative manifesto prior to the 2015 general election there had been a commitment to renegotiate some of the main terms of UK’s engagement with Europe and then put the improved terms to the UK public in a referendum.

The latter was in theory advisory for the government but in practice it has been treated, and spoken about, as the will of the people. Article 50 was triggered in March 2017, which allows for only a two-year period of negotiation including the negotiation of a withdrawal agreement and a framework for the future relationship. The triggering of Article 50 had massive support in parliament after the Supreme Court case decided that the government could not decide on its own. Once Article 50 was triggered the EU had effective control of the process.

Where is business in this?

A key question for government is when to call off ‘no deal’ preparations. The government has published a number of papers on the consequences of no deal, and Jill noted that they assume quite a lot of cooperation from the EU in future. One thing that parliamentarians are agreed on is that a no deal outcome would be disastrous for the UK. But the public discussions around the time of the Hardman suggested that the withdrawal agreement negotiated by the prime minister lacked support in many quarters and the absence of an acceptable approach to Brexit could conceivably lead to a no deal outcome.

On the evening before Hardman, the prime minister seemed to have succeeded in getting her cabinet on board but the next day there were a number of ministerial resignations, including the Brexit secretary. The prime minister still has to organise a meaningful vote in parliament in favour of the withdrawal agreement and there are a number of difficulties, including the continuing role for the Court of Justice of the European Union and supremacy of EU law in relation to EU matters.

It is unclear how long the UK will remain in the customs union and how much of the EU rule book the UK will have to follow as the price for remaining in that union. How much of the single market regulations will the UK have to follow?

What might be different post-Brexit?

Clearly the amount of flexibility available to the UK will depend on the terms of the future relationship with the EU, which is far from clear at the moment. There will be the potential to do things differently in policy areas no longer constrained by the EU, such as agriculture. There may be more flexibility on regulation and standards, as well as on VAT, which has hitherto needed to be consistent with the EU directives (though in Northern Ireland, VAT and customs duties will depend on the exit terms).

Brexit has highlighted a number of issues, such as real divergence between different parts of the UK, and the issue of stability in domestic policy-making: EU policies are fairly enduring, but UK governments tend to chop and change.

We are still waiting for a migration white paper, promised over a year ago. It has traditionally been easier to import cheap labour than to train and enhance skills but much of the cheap imported labour is in parts of the economy that do not need much greater skills. Jill did say that one part of the pro-Brexit critique which resonates is that firms have found it easier to import labour than invest. There could also be a more serious effort at regional rebalancing.

Taking back control

Jill thought that taking back control in areas like fishing, farming and trade policy might turn out to be more difficult than some people have imagined. If we are to maintain our international influence we are going to have to be smarter diplomatically. An analogy is the independence of the United States at the end of the 18th century when the US had some extremely talented people to make a success of their own version of taking back control. She ended by quoting the rather pertinent lyrics from the current West End show Hamilton:

“What comes next?
You’ve been freed.
Do you know how hard it is to lead?
You’re on your own.
Awesome. Wow.
Do you have a clue what happens now?”

Questions and answers

Jill was asked about the possibility of a second referendum. In response she said that the Electoral Commission had told her organisation it would take 22 weeks to run a good referendum and there would be considerable disagreement on the questions to be asked as well as the franchise for the electorate; should the age limit be reduced to include 16- and 17-year-olds?

In answering other questions, Jill said the UK had badly misread Europe in these negotiations. The EU has many more problems on its plate than just Brexit, including migration, the Italian Budget, Greece and the domestic political pressures in each jurisdiction.

About the author
Ian Young is an international tax manager at the Tax Faculty