A federal UK could pose taxing problem

Many will face the challenge of operating under what could be substantially different tax regimes. Picture: PA

Many will face the challenge of operating under what could be substantially different tax regimes. Picture: PA

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Business needs to prepare for change, says Laurence Ward

IT IS often said that the UK has an unwritten constitution, which is misleading. Much of our constitution is, in fact, codified in statutes, treaties, court decisions and parliamentary conventions. It is not the case, therefore, that our constitution is unwritten but rather that, unlike many other countries, it does not come in the form of a single document.

Those countries with written constitutions attempt to strike a balance between protecting enshrined rights and ensuring flexibility and, while it may be generally difficult to change the constitution, it is certainly not impossible. In the US, for example, there have been over 11,000 proposals to amend their constitution since it was put into operation in 1789 although only 27 of these have been ratified.

The UK position is different as our fundamental rights and institutions are not entrenched but are constantly evolving. It is this flexibility and adaptability of our constitution that will enable the rapid transfer of powers as proposed in the Scotland Bill to take effect. It will also facilitate further decentralisation of power to other regions in the rest of the UK (rUK). Within a matter of months we may have a radically different constitutional settlement – and that is before we consider the possibility of a referendum that might result in a withdrawal from the EU.

As the Scotland Bill winds its way through Westminster, the focus has been primarily on the potential impact the proposed new powers will have north of the Border when enacted. However there is also growing interest across the UK with a rising demand for greater devolution to other regions, not least England. As we move towards a far more federal structure than we have ever seen before in the UK, businesses need to prepare for these changes and should be considering how they will affect them.

Perhaps, for the first time, many will have to face up to the challenge of operating under what could be substantially different tax, employment, and regulatory regimes across different regions of the UK.

We can expect to see an upsurge in regional and political competition, with each legislature quite rightly seeking to gain economic and social advantage for those it represents through the powers it exercises. Naturally, for every action within one part of a more federalised Britain there is the potential for a reaction in another. The introduction of university tuition fees south of the Border demonstrates how a decision apparently affecting only England, Wales and Northern Ireland had significant consequences in Scotland where the policy of free tuition had to be adapted to address the threat of a huge influx of students from rUK competing for a limited number of places. The response was to introduce legislation to impose tuition charges on students from the rUK whilst, at the same time, maintaining the policy of no fees for qualifying EU students as required by European law.

Perhaps the area with the greatest potential for competition between the UK’s regions will be over the issue of tax rates. Together with the already enacted land and buildings transaction tax (LBTT), Scottish landfill tax and Scottish general anti-avoidance rule, the proposals brought forward in the Scotland Bill – particularly those in relation to income tax for Scottish residents – will result in a system of taxation operating north of the Border which is distinctly different from rUK. The recent modifications of the residential rates of LBTT highlight the knock-on effect of changes made in one legislature influencing the policy of another. To what extent will Scotland’s government choose to exercise new fiscal powers to differentiate from rUK?

While we don’t know at this point how such a federal UK will exercise its devolved or retained powers we can anticipate a much more complex, multi-jurisdictional environment that will undoubtedly create opportunities and challenges for the business community.

The differences between Scots Law and English Law have, over the past 50 years, largely been eroded, particularly in the field of commercial law. That may all be about to change. We can anticipate a much more complex, multi-jurisdictional environment.

Commercial law firms will be expected to know the law in each region and to be alive to the opportunities and challenges for clients.

Laurence Ward is Senior Partner, Scotland at CMS

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