Although the original Brexit date has now been and gone, the impact of Brexit from a tax perspective is still relatively uncertain. Whilst the UK government maintains that delivering a negotiated deal remains its top priority (and have voted against a no-deal Brexit), it does not appear that the UK is any closer to finalising the withdrawal agreement. Consequently, it remains unclear on what terms (if any) the UK’s withdrawal from the EU will take place. EU based businesses, which would prefer to operate in a constant and certain environment, are left having to guess how they will be able to transact with the UK once Brexit takes place. Although there are number of topics to be considered from a tax perspective, three key areas of concern are:
- cross-border VAT;
- customs duties; and
- withholding taxes.
At the point of the UK’s withdrawal from the EU, existing EU legislation, which is not already implemented in UK domestic law, such as certain provisions in the EU Treaties (for example, the fundamental freedoms) and EU Regulations, will cease to have effect in the UK without further UK legislation. The current proposal, as enacted last year, is that all EU law as at the date of Brexit will be converted into UK domestic law (to an extent that is practical). Therefore, broadly, the same laws and rules will apply in the UK immediately before and after Brexit, although the supremacy of EU law will be removed from that date. The hope of the UK government is that this will provide legal certainty and continuity at the point of Brexit whilst achieving the aim of eventually removing the UK from the jurisdiction of the EU courts.
Cross-Border VAT and Customs Duties
Subject to arrangements being put in place with regard to the border between the Republic of Ireland and Northern Ireland that result in the UK (or part of it) remaining in the EU customs union for an extended period of time, following Brexit there will be, for the first time since 1973, a customs border between the UK and the EU.
If a free trade area is agreed between the UK and the EU, EU origin goods will not attract customs duty on entering the UK (and vice versa). However, it is possible that the situation will become more complex for goods that are imported into the UK from the EU, but which do not themselves have an EU origin. Consequently, following Brexit, declarations of origin may be required for all goods entering the UK from the EU. If there is no deal and no free trade area is agreed, duty will be payable on all goods entering the UK from the EU. This is likely to be at rates equal to those agreed between the EU and World Trade Organisation (“WTO”) member countries who do not have a free trade agreement with the EU, as the UK is a member of the WTO in its own right. Irrespective of whether there is a deal with the EU, the UK will need to establish its own WTO goods schedules which will apply to trade with other countries in the absence of a free trade agreement.
The UK VAT rules are based on EU Directives and Regulations, which have been implemented into UK law. Consequently, after Brexit the UK will continue to have a VAT system which will remain relatively close to that in the EU. Indeed, the UK government has committed to keeping the VAT procedures as close as possible to what they are now. Therefore, for intra-UK supplies, the rules are unlikely to really change, or at least not immediately. Further, the place of supply rules for services are expected to largely remain the same.
However, some changes are going to need to be made where there is a no-deal Brexit. In particular, the UK has enacted legislation that provides that, bar any agreement to the contrary, imports and exports will be treated in the same way as those from or to non-EU countries. In other words, UK VAT will be imposed on all imports (irrespective of where these are from) and no UK VAT will be charged on exports.
Currently, as a member of the EU, the UK is subject to the EU Parent-Subsidiary Directive (2003/123/EC) and the EU Interest and Royalties Directive (2003/49/EC) (the “Directives”), which reduce or eliminate withholding taxes on payments of dividends, interest and royalties between associated entities (broadly, entities that have a direct participation relationship of 10% or more) that are resident in the EU. As the Directives have been implemented into UK law, even if the UK leaves without a deal the rules will continue to apply. Therefore, payments of dividends, interest and royalties by UK companies, or UK permanent establishments of EU companies, to associated EU companies, which currently benefit from the Directives, will be able to operate in the same way. In other words, additional withholding tax will not suddenly arise in respect of payments that would otherwise qualify for relief under the Directives that are made from the UK to the EU.
However, the position in relation to payments from EU companies, or EU permanent establishments of UK companies, to associated UK companies is more likely to be impacted by Brexit and the terms of any withdrawal agreement. If the UK does not agree that they will be able to continue to benefit from the terms of the Directives, the question of whether withholding tax will arise in respect of such payments after Brexit will be dependent on the approach of the specific jurisdiction and/or the terms of any applicable double tax treaty between that jurisdiction and the UK. Whilst many of the UK’s double tax treaties reduce or eliminate withholding tax on these type of payments, it may not give as favourable a result. Further, additional administrative burdens are likely to arise for the recipient who may need to apply for relief under the applicable treaty (and may have to go through a refund process, rather than being able to prevent the withholding from arising in the first place).
Whilst it is still difficult to plan for the tax implications of Brexit, in particular with respect to customs duties and VAT (as the border between the Republic of Ireland and Northern Ireland is one of the key sticking points to agreeing the withdrawal agreement with the EU), it may be beneficial for businesses to review:
- the terms of any contracts and incoterms, and in this context consider how import declarations will be submitted and whether additional VAT registrations will be required (either in the UK or vice versa); and
- whether any intra-group cross border payments to a UK entity are reliant on the availability of the Directives, and if so consider whether the terms of any applicable double tax treaty will help to mitigate this risk.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.