Further signs of the UK’s post Brexit divergence?

Last week the chancellor delivered his budget and one common theme that he was keen to emphasise was that leaving the EU gave the government the freedom to introduce new measures to improve people’s lives and grow the economy.  The three measures announced related to EU exit were, a reform of alcohol duty, a cut in domestic APD, and changes to tonnage tax. This blog will look at each of the measures in turn and evaluate their effectiveness. 

Reform of Alcohol Duty

Previously, alcohol duty had been levied based on the type of product in question, and a banding system that taxed different strengths at different rates.  Crucially, as this chart from the government consultation shows, stronger drinks did not necessarily attract higher rates.

Comparison of duty per unit below 22% ABV 

The new reform will look to restructure alcohol duty so that all alcoholic beverages will be taxed in direct proportion to their alcohol content. To simplify the regime, the government intends to reduce the number of main rates from 15 to 6, with common thresholds for each set of bands across product categories, and rates will be harmonised for drinks at 8.5% ABV or above. This new system has many qualities that render it an effective policy. First, it is simple and consistent, unlike the old system which was a product of various taxes introduced from the 1600s onwards. Secondly, it taxes products with greater amounts of alcohol and therefore greater negative social side effects more strongly.  Generally, the reform has been well received by the industry and campaign groups such the Alcohol Health Alliance.  

However, this measure will not apply to Northern Ireland as it remains in the EU single market for goods and the customs union. This will create a price differential between two parts of the UK, which will be potentially hard to implement without checks, and add a further complicating factor to EU-UK negotiations around the Northern Ireland Protocol. Despite this complication, the policy on balance remains positive and has only been possible as a result of Brexit, as previously alcohol duty was governed by EU directive. This EU directive has been subject to a recent reform, which does also seek to encourage smaller producers as the UK reforms do. But the fundamental restructuring of the rate bands would not have been possible while the UK was in the EU. 

APD 

The government’s intention is to support connectivity within the UK by restoring a cheaper rate of APD for domestic travel. For the tax year 2023/24, the rates for domestic flights will be £6.50 for the lowest class of travel and £13 for other classes. This is a reduction of 50% on the international rate.  A cheaper band was originally abolished in 2001 as the European Commission had ruled it legally defective as it did not treat all EU flights equally. 

From a policy perspective this measure reduces taxes on domestic flying and does not fit comfortably with the government’s green agenda.  Furthermore, the government may have been able to achieve its stated aim of boosting inter UK travel with more targeted measures, such as an expansion of routes that operate under Public Service Obligations (PSOs). PSOs, include Dundee, Derry, and Newquay to London, as well as a number of Scottish highland routes, each of which benefit from an APD exemption and direct subsidies. Of course, questions have been raised about how such a policy fits with the UK’s net zero aims, especially ahead of the COP26 summit. 

Tonnage Tax 

The final measures announced were changes to the tonnage tax regime. They include a change in the lock-in period for tonnage tax participants from ten to eight years, enabling HMRC to admit companies into the regime outside of the initial window of opportunity when there is a good reason to do so, and the removal from consideration of flags from EU and EEA countries to promote the use of the UK’s red ensign.

The purpose of this measure is to boost UK competitiveness by offering a tax incentive to companies that register their ships within the UK. In reality this measure is small and is unlikely to have much effect. This is in part due to other considerations that play into where ships are flagged such as the labour laws of the home state. Much of the substantive reforms to this tax were also possible whilst in the EU. The most significant element that has been enabled by our departure is the UK is now no longer obliged to recognise flags of EU members states for tonnage tax purposes, and so the red ensign can be promoted. Taken overall this policy change is not particularly substantive for UK competitiveness.

What is the overall impact of these measures?

In Summary, of the 3 measures that the government identified in the budget as being enabled by Brexit, by far the strongest and most positive is the reform of alcohol duty. This measure will help alcohol be taxed more fairly and consistently and may also help reduced some of the negative effects associated with alcohol sales. The consultation on the reform of alcohol duty does not close until January 2022, meaning that any business that is affected still has time offer their feedback on the changes to the government.

The other two measures are of smaller economic impact, and their effect is likely to be marginal in the case of the tonnage tax, or even negative from an environmental standpoint with regards to APD. Overall, though, the bigger question will be whether these sorts of tweaks are the extent of the regulatory dividend from leaving the EU or whether the Government will be able to deliver on its promises of more sweeping reform. We, as others, will be watching closely. 

Author:

Henry Morris
Tax Consultant
henmorris@deloitte.co.uk