The current Government led by Theresa May has noticeably failed to bake any “Brexit dividend” into its policies for the coming 5-year Parliament. This is concerning because it may indicate either that they have not yet figured out the sources and extent of the financial benefits from Brexit, or that they are not going to pursue the negotiations with the EU in order to garner them, or both.

The guideline financial benefit is £50 billion per annum, or £961 million per week: almost three times the “battlebus” figure of £350 million, and approximately the size of the black hole in the Labour Party manifesto pledges for the recent election.

The keys to garnering the difference between the two figures lie in structuring a fair deal on the EU economic migrants already in the UK and on the taxation of corporate profits. “Fair” means fair to the UK population as a whole.

Talk of “a breakthrough” supposedly achieved on the first day of negotiation in the matter of the rights of EU citizens living in the UK must be a concern if this turns out to mean that the status quo is preserved for the 3.6 million citizens of other EU countries now living in the UK, since this heading contains the single largest amount of money connected with these negotiations.

It is vital that real “reciprocity” on this matter is achieved: the same amount of money flowing in both directions and for the same amount of time.

This is not the same as striking a deal that has an equivalence in words but not in figures, applying equally to EU citizens here and UK citizens living elsewhere in the EU. There are only 1.2 million UK citizens so affected, and these bald figures do not reflect either the annual cash value of the services delivered in the UK to EU citizens as compared to those delivered to UK citizens in other Member States, nor the age demographic: for what period will these services need to be provided?

Research based on the UK government’s National Labour Survey and issued by Global Britain indicates that the UK subsidises the public services obtained by each of the EU citizens in the UK by just under £10,000 each per annum. This figure is the difference between (i) their direct and indirect tax payments and national insurance contributions on the one hand and (ii) the costs to the UK state deriving from their usage of public services on the other.

In other words, the annual cash cost to the UK state of the 3.6 million EU citizens currently in the UK is £30 billion per annum. If the trade proposed by the UK government involves the exact same cost per head being spent by other EU Member States on UK citizens, then the annual cash cost on that side would be £10 billion, resulting in a net detriment to the UK under this heading of £20 billion per annum.

There is also the question of demographics: if the average UK citizen involved is a pensioner living in Spain and the average EU citizen in the UK is aged 25, then the cost to the UK will be of far longer duration than the cost to the other EU Member States. Mr Davis’ travelling direct to Spain from the first day of negotiations in Brussels could be taken to indicate that it is exactly this type of UK citizen that constitutes the average, and that the main country with whom a deal needs to be done is Spain.

Whatever has actually transpired so far, the UK government needs to now justify whatever position it has taken in the negotiations by qualifying the computations around which it is proposing a “trade” on this issue, based on:

• Confirmation of numbers of people involved
• Age demographic – to indicate for how long the people will be contributing funds and drawing benefits
• Analysis of usage of public services:

o   in the UK, this would indicate whether the consumption per annum per head is more or less than the £10,500 average

o   in other Member States the figures would need to account for the actual cash value of the public services usage and not assume that the level of the service or the cost are the same as the provision in the UK

• Analysis of contribution of direct and indirect taxes and national insurance contributions

That analysis will then deliver two figures:

• Confirmation, or not, of the estimate above that there is a cost to the UK of £30 billion per annum, and for how long that cost will persist;
• The equivalent figure for the 1.2 million UK citizens living in other EU Member States and for how long that will persist. The assumption made in this article that there is a parity of cost-per-head on both sides is no more than that, although the costs on the UK side are based on research undertaken for Global Britain.

These figures can then be expressed as a Net Present Value, and we can then see what money should flow from other EU Member States to the UK as a lump sum, or in the other direction, for the status quo to be maintained.

There are, of course, other ways of doing it, to ensure reciprocity, but also to cap the liabilities of the rest of the citizenry of the UK. For example, the rights of EU citizens to continue to live here could simply be curtailed as of March 2019, along with their rights to UK benefits and pensions, beyond a single pension transfer payment that buys as many years of entitlement in the state scheme of their home member state as they have paid NI contributions for into the UK scheme:

o   They do not retain an entitlement to the UK state pension;

o   They get as many years’ entitlement in the state system of their home member state as they paid for into the UK scheme.

If this approach were to be adopted, the transfer value of UK citizens’ contributions into the state schemes of other member states must be offset against it and those UK citizens awarded as many years of the entitlement in the UK scheme as they accrued in their host member states while abroad.

Another alternative would be for the 1.2 million UK citizens living elsewhere in the EU to apply for nationality in the member state where they are now living, and to continue to accrue rights in the state system there; when they get foreign nationality, they would surrender their UK passport and the UK would pay over a transfer value to buy them as many years of state pension in their new home country as they had accrued while working here.

Were this to be the arrangement, then the 3.6 million EU citizens would be free to apply for UK nationality, and the UK would have to have a scheme to adjudicate whether those applications are accepted. If they are not, the person would be obliged to return to their home member state, and the transfer value of pension rights would be paid over.

The first key point here is that no-one will have dual nationality. The second key point is that there is always a third-party to the tests of fairness of the arrangements, beyond just the UK government and the individual involved. The third-party is the UK taxpayer, who should not be called upon to subsidise any economic migrant. This has been one of the major failings of the EU from a UK perspective and a main cause of the failure to eliminate the public spending deficit.

After the Eurozone debt crisis of 2011 the UK rose in attraction as a place of employment, and the previous Conservative/LibDem government made great play on the increase in numbers of people employed and the increase in GDP that resulted. Unfortunately, and as the National Labour Survey has shown, these were mainly low-skill/low-wage jobs taken by EU economic migrants, and each such job has cost the country money.

In order to block every breach in the financial dam, the UK’s negotiators need to make sure there is a comprehensive exit on several other issues including:

• Release from all the contingent liabilities associated with (i) the 2013-2022 Multiannual Financial Framework for the EU Budget and for all preceding budget periods; (ii) the European Central Bank; and (iii) the European Investment Bank – EUR1.3 trillion in all;
• Buying out the European Investment Bank’s loans into the UK and then offsetting - against the reimbursement to the EIB - the UK’s book of Student Loans to citizens of other EU Member States who have studied in the UK, taken a UK student loan, and returned to their home countries or elsewhere without repaying it;
• No further payments into the EU Budget after March 2019.

If the EU does not agree to all of the above and to one of the approaches outlined regarding citizens living outside their home EU Member State, the UK’s fallback would be to open the issue of the past – as well as the future - costs of the 3.6 million migrants and their benefits and pensions. If they are to stay in the UK, their home member state should pay that cost in cash every year, with a mechanism to adjust it annually, and make an upfront payment of the retrospective costs that the UK has already shouldered.

For the future we have to have it in our own hands to define our migrant worker regime for workers from anywhere in the world, and the start point can be a fairly easy one:

1.    A maximum six-month visa for seasonal and contract workers, with no access to UK public services: the employer would need to show an insurance policy for healthcare during the worker’s stay in the UK and pay – and show they had paid – the premium upfront;

2.    A work permit for a permanent, salaried position, as long as the salary is on a PAYE basis and is a minimum £50,000 per annum. The person would have full access to UK public services and the direct and indirect taxation and national insurance would certainly be above the £10,500 average consumption of public services.

As for the other elements of the UK’s financial relationship with the EU going forward, these come down to the terms-of-trade.

The two essential elements here are:

• What replaces our current membership of the customs union and Single Market;
• How we protect ourselves from predatory tax practices of other EU Member States.

The guiding principle is that it is impossible to remain part of the customs union and Single Market and also preclude predatory tax practices.

To solve the latter issue, the UK needs to rewrite its domestic corporate tax code by drawing up industry templates for cost/income ratios through which HMRC could run the group-wide figures of the likes of Google and Amazon, and the many other companies who benefit from the Freedom of Establishment and the sweeteners embedded in the domestic corporate tax codes of Ireland, Luxembourg and the Netherlands in particular.

Whatever the appearance these companies might present about the extent of their UK business, HMRC would be accorded the right to look through to the substance, and extrapolate the profits of their UK business from the company’s group-level sales and from a template of costs that would apply to a UK company undertaking the same business from a 100% UK base, and not with the activities split between the UK and other EU Member States.

This splitting of activities is underpinned by the implementation of odorous “transfer pricing” that lands the costs in the UK and the profits in Ireland, Luxembourg or the Netherlands. Instead the UK needs a new regime:

• HMRC can make assumptions about the group’s UK sales from the group’s global Profit&Loss account;
• Then HMRC can derive their UK costs and their UK pre-tax profits through applying the industry templates for 100% UK-based companies undertaking the same activities;
• Whatever the company says is the profit of the UK subsidiary, HMRC would then respond with the UK’s official version of their profits, on which they would pay 16-17%, or whatever the standard rate is;
• HMRC would send the company an Advance Payment Notice for the difference between what is in their own tax return and the UK’s computation, regardless of what tax the company had paid in Ireland, Luxembourg or the Netherlands.

The remaining issue is import/export tariffs. These can be negotiated in the knowledge that the UK exports approximately £280billion of goods and services to the EU now and imports about £360billion, an annual trade deficit of £80billion (Source: Walbrook Economics).

Given this imbalance to the UK’s detriment, the UK should have no qualms about going onto World Trade Organisation terms. If tariffs of on average 10% were applied by other EU Member States to the UK’s exports under these terms, this would amount to a detriment of £28billion per annum. However, the detriments caused by EU membership fees (net £9billion), Freedom of Movement (net £20billion) and Freedom of Establishment (£11billion) total £39billion, and outweigh the tariffs that would be imposed on UK goods and services under WTO rules.

By the same token, if the EU imposed 10% average tariffs on UK goods and services, the UK could do the same in return. In that case HMRC would receive £36billion in customs revenues, enough to subsidise all of our EU exports:

• Assume an export was to be made for £50,000 and the EU tariffs would have raised this to £55,000;
• The UK government sets up a scheme allowing the UK exporter to still quote a £50,000 all-in price, but composed of a cash price of £45,454 plus 10% EU import duty of £5,454 = £50,000;
• The UK government reimburses the UK exporter with the £5,454 of duty so the impact of the duty is neutralised;
• Even if EU governments did the same in return, the UK as a whole would still be better off by £8billion per annum: 10% of the UK’s negative trade balance with the EU.

On top of that the UK would be able to strike trade deals with non-EU member states at lower tariffs than apply now, when they are set at an EU level.

There is, however, one proviso to the above. The UK government should only reimburse EU import duties to UK exporters where the UK goods and services being exported into the EU have a minimum of 70% UK content. There would be an exclusion where goods/service are prepared mainly outside the EU, imported into the UK for finishing, and then re-exported as UK product i.e. as an EU product. This kind of “trade deal shopping” adds little value to the UK. Where the Confederation of British Industry lobbies for continued access to the Single Market, it would be interesting to know how much usage their members are making of the UK as an entrepot to “game” the Single Market rules, as opposed to their investing and creating proper jobs in the UK: the latter deserves UK government support, whilst the former does not.

The main penalties, then, of the UK negotiators failing to reach any kind of agreement with the EU negotiators by March 2019 can be summed up as:

1.    EU import tariffs being imposed on the UK’s exports of goods and services, which, for purposes of illustration, we have put at a detriment of 10% of £260billion, or £26billion;

2.    The necessity of providing public services for 1.2 million UK citizens living in other EU Member States now, at an assumed cost of £10billion per annum based on parity of cost with that the UK bears now for providing public services to the 3.6million citizens of other EU Member States;

3.    Loss of estimated £5billion per annum of grants from EU bodies into the UK.

The total detriments would thus amount to £41billion per annum.

Were the negotiations to fail in that way, the financial benefits to the UK would be:

1.    Imposition of tit-for-tat import duties on EU goods and services, at the same level as imposed by the EU. If that were at 10% and on the current level of EU imports, the UK would book £36billion of import duties;

2.    Cessation of payment of £14billion per annum EU Member Cash Contribution, out of which the £5billion per annum of grants from EU bodies back into the UK are funded;

3.    Cessation of the need to bear the cost of the public services for the 3.6million citizens of other EU Member States currently in the UK, which is £30billion per annum;

4.    New revenue in Corporation Tax on tax-efficient EU business models where profits are currently concentrated in Ireland, Luxembourg and the Netherlands, calculated by the author for Global Britain at £11billion per annum.

The cash benefits amount to £91billion per annum, as contrasted with the cash detriments of £41billion – a net cash benefit of £50 billion per annum.

The difference expressed as a Net Present Value may well be far higher if one were to calculate the relative periods over which public services would need to be provided to EU citizens in the UK compared to UK citizens in the rest of the EU, based on age demographic.

In addition, the failure of negotiations and the UK’s exit from the Treaty of the Functioning of the EU would release the UK from EUR1.3 trillion of contingent financial liabilities. In order to ensure this release, the UK government should buy out all of the European Investment Bank’s loans into the UK:

• Adjusting the payment in the EIB’s favour for their loss on redeployment of funds, where the EIB has funded its loans at higher interest rates than prevail now (the loans will be set to those higher rates so the UK would earn this adjustment back over the life of the loans);
• Offsetting the value of the Student Loans to students from other EU Member States.

This last point could be of course be challenged, with the UK’s position being that allowing these students to study here and take out a student loan here were part-and-parcel of the UK’s membership of the EU and should not survive the UK’s withdrawal.

Apart from that, the UK could simply enact the remainder without striking a Brexit deal in negotiation. This should then be the baseline: the negotiation needs to achieve a better outcome for the UK than the result if no negotiation were undertaken at all.

Since the “no negotiation” route can be expected to deliver £50billion per annum cash benefits and release the UK from (i) EUR1.3trillion of contingent liabilities and (ii) a liability to provide public services to EU citizens of a far longer duration than the likely need to take over public service provision for UK citizens currently in other EU countries, the UK negotiating position is straightforward: the above is a minimum outcome and is completely acceptable. The negotiating task is to improve on that, and walk away if that is all that can be achieved.

The walk-away can deliver £50billion per annum cash benefits: 2/3rds of the UK’s public spending deficit and enough to bring austerity to an end, and without Labour’s Land Value Tax and financial conjuring tricks.

By Bob Lyddon