We have highlighted below some of the key tax issues that businesses should be considering as part of their planning for Brexit.
The tax consequences of Brexit will depend to some extent on the new relationship negotiated between the UK and the remaining EU member states. VAT and customs duty are European taxes, which have been implemented into UK law; post Brexit, the UK will have more freedom to determine its own policy in these areas, subject to any agreement the UK enters into with the EU agreeing the parameters of the UK's exit, any transitional period and any future partnership. Whilst the UK is able to decide its own policy in relation to direct taxation (such as corporation tax), currently, UK laws must be consistent with the EU fundamental freedoms. It is also likely that Brexit will have indirect consequences on taxation policy and legislation, as the UK responds to the altered economic and commercial position outside the EU.
From the time of Brexit, or later if the UK enters into the Withdrawal Agreement (see below), the UK will be free to decide whether to retain or repeal existing VAT legislation, although it is extremely unlikely that the UK government will abolish VAT (or even replace it) due to the cost. However, the UK could tinker around the edges with VAT, reforming illogical areas and departing from CJEU decisions which are against the UK's preferred policy outcomes.
There may also be changes to the place of supply rules and the time at which VAT is payable. For example, cross-border supplies of goods to the UK will be subject to import VAT rather than acquisition VAT. This will result in UK VAT registered businesses (that have not been approved for deferment) paying VAT on supplies of goods from remaining EU countries at an earlier time – the time of import - than would currently be the case, giving rise to a cash flow disadvantage (although the UK Government has announced that, post Brexit, VAT registered businesses should be able to account for import VAT on imports of goods from EU and non-EU countries on their VAT return, rather than at the time of import).
There are also VAT administrative simplifications that would not be open to UK VAT registered businesses post-Brexit (unless specifically preserved). For example, suppliers of digital services can register for VAT in one member state and use the mini one stop shop (MOSS) to discharge their VAT liability in other member states (rather than register and file returns in each member state in which the business has customers.)
The UK's Courts and Tribunals have been required to interpret the UK's VAT law in conformity with EU VAT Directives and previous CJEU decisions. Post Brexit, the judiciary must take into account previous CJEU decisions relating to retained EU law as at exit day (unless the legislation in question has been subsequently modified by Parliament). However, the Supreme Court will have the discretion to depart from pre-exit CJEU case law.
Position under the Withdrawal Agreement: the UK will continue to be subject to EU VAT law and the jurisdiction of the CJEU during the transitional period. At the end of the transitional period, wind-down provisions will apply in relation to cross-border supplies of goods, VAT refunds and access to EU VAT information databases.
VAT provisions in commercial contracts should be checked to ensure that they are "Brexit-proof". For example, VAT provisions defined by reference to EU VAT legislation only may not cover UK VAT, or any future replacement of it, following Brexit.
Businesses which use the UK's MOSS to discharge VAT liabilities in other member states should consider the process for registering for the non-EU MOSS scheme in a remaining EU member state. More generally, businesses should understand the relevant VAT filing, payment and refund mechanisms in the EU member states in which they sell goods. The EU VAT refund mechanism will be unavailable to UK exporters in the event of a no-deal Brexit.
The UK is currently part of the EU's Customs Union, and so it benefits from the removal of customs duties, quotas and procedures on the movement of goods within the EU, and the application of uniform external customs tariffs imposed on goods entering the EU from other countries. Customs duty is imposed directly by EU Customs Duties Regulations and will not apply to the UK once it leaves the EU. The UK will introduce its own legislation on customs duty, although the nature of this legislation, and the tariff rates, will depend upon the nature of the customs agreements that the UK negotiates with the EU and third countries. In the event of no-deal, the UK would be free to sign-up to free trade agreements with third countries without the constraints of the EU's Common Commercial Policy. Until those agreements are reached, the UK would hope to trade under the WTO's 'most favoured nation' terms (as the UK is a WTO member), however, other WTO members have not yet agreed the UK's proposed tariff schedule.
Withdrawal Agreement: The UK (Great Britain and Northern Ireland) will continue to participate in the EU's Customs Union (and single market) during the transitional period, and will be subject to EU Customs Duty Regulations to differing degrees. The jurisdiction of the CJEU will continue during the transition period. Therefore, the legislative and operational landscape will look very similar. At the end of the transitional period, wind-down provisions will apply in relation to goods still in circulation, customs administration and access to EU customs information databases. Under the backstop, there would be a single customs territory between the UK and the EU, but it will be a fiscal customs union only in relation to Great Britain: goods moving from Great Britain to the EU will pass tariff free (and vice versa) but there will be a regulatory border. Northern Ireland will continue to apply a significant number of EU customs rules to prevent a hard border (for tariffs or regulatory checks) between Northern Ireland and the Republic of Ireland. This will inevitably mean a regulatory border between Northern Ireland and Great Britain.
For further details on the existing customs arrangements, and the nature of the arrangements which may replace them, please see Brexit: Customs Arrangements.
Businesses with cross-EU supply chains should be considering the impact that changes to import/export duties and VAT, and additional customs clearance procedures, will have on their business. However, as the nature of trade agreements post-Brexit is still unclear, it will be difficult for businesses to conduct detailed planning.
UK importers should consider opening a deferment account for customs duty and VAT (this may require the provision of a financial guarantee). Businesses exporting to remaining EU member states should check whether local customs law requires any particular import administrative arrangements (such as the appointment of a customs agent to assist with import declarations). UK importers and exporters should register for an UK EORI (Economic Operator Registration and Identification) number, which will be required when trading with EU and non-EU countries post-Brexit.
Barriers to trade – EU direct tax directives
There are a number of EU direct tax directives, implemented into UK domestic law (and the domestic law of other EU member states), which mean that UK parent companies receiving interest, royalties or dividends from subsidiaries elsewhere in the EU will generally receive those payments free from withholding tax imposed by the EU countries in which the subsidiaries are located (the EU Parent-Subsidiary Directive and the EU Interest and Royalties Directive). Following Brexit, the UK will no longer be an EU member state for the purposes of applying such directives, meaning that UK parent companies could be subject to greater (foreign) tax.
The UK's network of double tax treaties will limit the impact of the removal of these directives, where the UK and the relevant EU country have agreed a 0% rate of withholding tax on the cross-border dividend, interest or royalty payment. However, UK companies will lose withholding tax protections where the rate of withholding tax agreed in the relevant double tax treaty is at a rate above 0% (e.g. interest payments from an Italian or Portuguese subsidiary).
The UK does not generally impose dividend withholding tax on outbound dividend payments to foreign companies, so the position for an EU parent company is likely to be the same. However, UK withholding tax of 20% may be applicable to royalty or interest payments to EU companies (again, dependent on the terms of the relevant double tax treaty).
UK domestic legislation currently exempts the receipt of dividends paid to a UK parent company from corporation tax (subject to the dividend satisfying the conditions of the dividend exemption). It is not envisaged that the UK will make changes to its dividend exemption following Brexit, as this would damage the UK's position as a holding company jurisdiction. Other EU countries could, however, tax EU parent companies on the receipt of dividends from UK subsidiaries.
Whilst the UK's network of double tax treaties will mitigate the impact of Brexit somewhat, groups should consider what payments are made into the UK from an EU group member (and vice versa) to assess where additional taxation may arise.
Other potential changes
The UK's direct tax legislation is the competence of the UK and it is not based upon EU law. However, as a member of the EU, the UK has been required to act and legislate in accordance with EU law principles, such as the freedom of establishment and the free movement of capital. Post-Brexit, the UK will have more freedom to:
- amend legislation to reflect the UK's preferred policy outcomes (e.g. controlled foreign company rules, group relief rules);
- give tax breaks for specific industries without having to satisfy the requirements of the EU state aid rules (although the freedom here will depend upon the terms of any future agreement with the EU); and
- charge capital duty on an issue of shares and SDRT on transfers of shares into clearance services (currently prohibited by the EU Capital Duties Directive).