Contributions in Merlin

This Master’s thesis examines the possible consequences and implications on the UK VAT system caused by Brexit. A comprehensive analysis on possible future scenarios, consideration of current political discussions and interviews with various tax experts predict small direct changes for the UK VAT system by exiting the EU. With Brexit the UK will be free to set its own VAT rates, apply zero-rating again and will not be bound by decisions of the European Court of Justice anymore. Due to the lack of the “intra-Community” transaction type, all non-UK supplies and purchases of goods will be treated as exports and imports causing higher administrative burdens, longer processing times and therefore higher costs for UK companies trading with EU businesses and vice versa. For the British financial services sector Brexit might bring unexpected benefits from a VAT perspective. With Brexit, British financial services institutes might be able to deduct input VAT on the services provided to companies being established in the EU. After Brexit, the UK will not be able to participate in further VAT harmonization measures of the EU. Of highest importance will therefore be, that the UK will monitor changes in the EU VAT area closely and will try to align. Only an aligned VAT system will support frictionless trade between EU and UK companies by reducing complexity and minimizing double or non-taxation.

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On the 23rd June 2016 the British citizens voted in a referendum to leave the European Union (EU). This decision known as Brexit-vote will end the 46 years lasting EU membership of the United Kingdom (UK) on the 30th March 2019. This Master’s thesis analyses the practical consequences and implications arising from Brexit for UK companies with regards to Value Added Tax (VAT). With Brexit, the EU VAT Directive ceases to be applicable in the UK and therefore the national legislation, the Value Added Tax Act 1994 (VATA), will not be restricted or bound by this framework legislation anymore. In a first step, an extensive research on the Brexit in general was conducted. Thereafter, the above-mentioned legislations were analysed whereby the author focused on the major consequences of becoming a non-EU country for the UK. Being mainly interested in the practical effects for the British economy and for individual UK companies, the author interviewed four leading tax experts from Switzerland and Belgium. In these interviews the direct effects of Brexit on UK VAT, the implications especially related to the financial services industry of the UK and the long-term consequences for the tax system were discussed. Simultaneously, the author assessed four different future partnership scenarios for the UK and the EU while continuously monitoring political developments, discussions and the uncertain way forward. The main part of this thesis is based on written sources dating latest 22nd November 2017 while the reader is informed in a special chapter on recent political developments by 8th December 2017. Due to the timeliness of Brexit and a strongly divided UK parliament, the uncertainty on a possible future partnership remains high. The consequences as presented below were drawn up under the assumption that no special tailor-made partnership between EU and UK in terms of VAT is going to be reached and are based on the fact of the UK being no further a member of the EU as from spring 2019. With Brexit the UK would theoretically be able to abolish the VAT or to replace it by a different tax. However, contributing around 20 per cent to the overall revenue of Her Majesty’s Revenue and Customs (HMRC) and being applied in more than 165 countries worldwide, the VAT system is expected to stay in place in the UK after Brexit. Furthermore, the UK will be free to determine its own standard VAT rate not being restricted anymore by the minimum 15 per cent rate applying for EU member states. However, the current standard VAT rate of 20 per cent is not expected to be lowered in the near future. Outstanding financial contributions payable to the EU, pressure to lower corporate taxes, bureaucratic and infrastructure costs of Brexit and the global trend suggest rather an increase of the VAT in the long-term. Even if the UK will not be restricted in the amount of reduced VAT rates or the list of exempt products in the future, major changes are not expected. Small adaptions could occur to show potential benefits of Brexit to the public. However, it is suggested to keep the VAT system as lean as possible and to reduce the complexity to prevent higher administrative costs or additional complications for businesses. The UK will not be obliged anymore to interpret the UK’s VAT legislation consistently with judgements of the Court of Justice of the European Union (CJEU) after Brexit. Nevertheless, the author expects a strong alignment to EU VAT legislation in the future to reduce possible double or non-taxation of cross-border transactions. The UK’s core objective of free and most frictionless trade between the EU and the UK underlines the need for continuous harmonization of the British VAT system with the EU VAT Directive in the long-term. However, this alignment will mostly be limited to the taxation of services, considering the upcoming changes in the EU VAT area and the fact that the lack of EU membership might lead to increased disadvantages in VAT compared to nowadays. An expansion of the Mini-One-Stop-Shop (MOSS) to all kind of goods and services by the EU, thereby considerably facilitating the cross-border supply between EU countries, could lead to a significant disadvantage for UK companies after Brexit compared to the status quo. In order for them to profit from these simplification schemes, an increase in VAT registrations by UK companies in the EU is expected, triggering larger costs, longer processing times and growth in complexity. An advantage of the EU’s VAT Action Plan for the UK might be the EU’s intention to give more rights to individual member states regarding VAT rates policies. Loosening the current regulations and increasing freedom for individual EU countries might help to mitigate a possible divergence between the EU countries and the UK, all of them being free to set their VAT rates. While the EU VAT Directive and consequently the VATA distinguish between domestic supply, export and intra-Community supply, the last transaction type will vanish after Brexit. All supplies to non-UK companies will be treated as exports from a UK VAT perspective. On one hand, UK companies will be exempt from the Intrastat reporting requirements monitoring the movement of goods between EU member states and providing information on potential VAT fraud. On the other hand, all supplies to non-UK countries will have to be accompanied by export documents thereby causing an increase in administrative efforts. With Brexit, the simplification scheme “Triangulation” for cross-border supply of goods will also cease to apply for UK companies having large effects on international supply chains and in the worst case, leading to the dislocations of affected companies. The lack of the intra-Community transaction type will not have a direct impact on the VAT revenue of the UK government, because intra-Community supplies and exports are both exempt from VAT. For British financial services institutes Brexit might bring unexpected benefits from a VAT perspective as there might be the possibility to deduct input VAT from the generally exempt financial services in the future. However, even more severe than the VAT consequences for the businesses will be the drop out of the single market and the customs union and potential customs duty. For the UK this implies the requirement of border controls and origin checks. Cross-national differences in regulations can lead to delays at the border impacting international supply chains in general and companies working on a just-in-time principle particularly. Considering the interconnectedness of the UK and the EU, this might lead to less trade, higher prices and ultimately to a decrease in living standards and prosperity for both parties. Especially affected by the drop out are going to be financial services institutes by potentially losing passporting rights and the ability to serve EU countries from within the UK. The huge fragmentation in the regulation of financial services, only partially existing equivalence regimes and prevailing uncertainty already trigger the dislocations of well-known international companies having first serious effects on the global financial centre London. However, the latest political developments suggest a strong alignment of the UK to the single market and the EU customs union. Even a continuance in the single market and the EU customs union seems possible, considering the most recent deal on the withdrawal of the UK. This is caused by the recent agreement to leave the border between Northern Ireland and the Republic of Ireland open for people and trade. It remains unclear how Theresa May intends to simultaneously leave the single market and the customs union while having an open border with the Republic of Ireland, the latter being an EU member state. Nevertheless, nothing is agreed until everything is agreed and the path to a final deal remains long and stony. In 2018, phase two and therefore negotiations on a future cooperation between the UK and the EU will finally start after having reached an agreement on the divorce of these two parties by December 2017. These negotiations could lead to mutually beneficial agreements and to the desired deep and special partnership which was outlined multiple times by Theresa May. This of course could mitigate the described consequences by signing tax treaties favouring both sides or by granting the UK a special status for VAT treatment. Analysing the negotiating power of the two parties and keeping the first deal in mind makes clear, that the UK will face tough negotiations to achieve a special and beneficial treatment without granting considerable financial contributions or the acceptance of the Free Movement Directive. This Master’s thesis was written in the hot phase of the first negotiations therefore giving an overview on possible economic consequences of Brexit and particularly focusing on the implications for the UK VAT. The practical perspective, gained through interviewing leading tax experts, gives first-hand business insights to the reader and generates awareness for the VAT issue as a rather shortly discussed topic. The presented consequences are for sure not conclusive but provide a solid basis for further detailed analyses. Having reached a first agreement by the end of 2017, increases the likelihood for certain scenarios leading to the possibility to focus in further researches on less possible negotiations outcomes and increase therefore the level of detail.

This paper shows that both bank balance sheet composition and credit supply significantly respond to a decrease in the relative cost of bank equity. To do so, we exploit the staggered introduction of tax reforms in Europe from 2000 to 2012 as exogenous sources of changes in the cost of equity. We investigate the effect on credit supply using loan level data in a country where firms are not affected by these reforms, and where foreign banks affected by the reforms are lending actively: Germany. We find that the relative decrease in the cost of equity leads banks to rely more on equity financing and to increase lending to firms, while decreasing security and interbank asset holdings. Overall, our paper shows that taxation can be an effective tool to monitor bank leverage and credit supply.

We use a unique longitudinal data set to study the development of non-cognitive skills in adolescence. We measure – for the first time – the development over six years of the recently introduced non-cognitive skill “Grit.” We also measure the traditional Big Five personality traits. For Grit, we find significant within-person mean-level increases of about .5 standard deviation units for our sample of adolescent students. These increases are comparable with increases in the Big Five, where conscientiousness, agreeableness, and emotional stability also increase with similar magnitude. We show that these changes are heterogeneous and robust to reasonable measurement error.

We study front-running by high-frequency traders (HFTs) in a limit order model with continuous trading. The model describes an evolutionary equilibrium of low-frequency traders who compete in portfolio management services by offering investment styles. The introduction of front-runners inflicts heavy losses on speculators, while leaving passive investors relatively unscathed. This encourages investment in the market portfolio and markedly reduces overall turnover. Speculative trading persists despite its lower profitability. By most measures, market quality is not affected to any significant extent by front-running HFTs.

The common risk measure classifies a financial position by the minimal amount of external capital that must be added to the position to make it acceptable.We introduce a new concept: intrinsic risk measures, which provide a more direct path from unacceptable positions towards the acceptance set. External capital is avoided and only internal resources are used. An intrinsic risk measure is defined by the smallest percentage of the currently held financial position which has to be sold and reinvested in an eligible asset such that the resulting position becomes acceptable. We show that this approach requires less investment in the eligible asset to arrive at acceptable positions. It evades the problem of infinite values while desired properties such as monotonicity and quasi-convexity are preserved. We derive a representation on cones and a dual representation on convex acceptance sets and we detail the connections of intrinsic risk measures to their monetary counterparts.