Tax: legal implications of Brexit for your business
Published on 29th Nov 2018
Much of the UK tax code is independent from EU influence, with a few exceptions (most notably, VAT), and therefore will largely be unaffected by Brexit. If the draft UK-EU Withdrawal Agreement is ratified, the present position as regards tax would remain in place until the end of the transition period (31 December 2020, subject to any extension of the transition period).
In the areas that will change, however, the practical effects of Brexit for UK taxpayers may be more about changing certain of the technical rules rather than increasing (or decreasing) the overall tax burden on taxpayers. Amongst the most significant effects will be the following:
- Brexit may have an impact on the tax treatment of cross-border corporate transactions, as some of the rules governing how those transactions are taxed emanate from the EU. The impact will be felt soon after the UK leaves the EU, as the existing EU rules will no longer apply following the UK’s departure, and this may create some uncertainty about how transactions with a cross-border dimension will be taxed. The uncertainty will last until the UK negotiates bilateral treaties with individual countries to replace the EU rules.
- Following Brexit there will be some immediate VAT consequences for some businesses who are subject to certain intra-community VAT rules. In the medium/longer term, in principle, the UK will have more scope to reform the VAT system in the future, although the UK government has indicated that it is likely to remain closely aligned with the EU VAT rules. A reduction in the UK rate of VAT is unlikely.
- Minor parts of the UK direct taxes code were amended to comply with EU law principles such as the freedom of establishment and free movement of capital: for example, cross-border group relief for losses (following the Marks & Spencer case). After Brexit the UK could undo these provisions.
These issues, and the wider consequences of Brexit for tax law, are considered in more detail below.
The scope and operation of the UK’s VAT system is currently governed by EU law and is, at present, largely harmonised with other EU Member States in order to facilitate European trade.
Following Brexit, the effect of the European Union (Withdrawal) Act 2018 will be that the body of EU VAT law which exists on Brexit will be transposed into UK domestic law – including the UK retaining the VAT abuse of law doctrine (from the Halifax case).
Since the UK VAT regime will no longer be governed by EU law, the UK will be able to make potentially wide-ranging changes to the VAT system, although in the short-to-medium term the UK will likely remain aligned with EU rules. VAT is a significant revenue raiser for the UK (accounting for around 18% of the total UK tax take in 2017-18), which suggests that reductions in VAT rates are unlikely.
There would be immediate VAT consequences following Brexit for UK business engaged in certain types cross border EU trade (as the cross-border VAT rules are presently largely based on EU law).
These include the special intra-EU distance sales rules ceasing to apply and UK businesses not qualifying for the EU VAT MOSS regime (Mini One Stop Shop for B2C supplies of certain electronic services).
UK businesses providing electronic services would either have to register in each EU Member State where they makes such supplies to a consumer or register in a Member State for the non-EU MOSS scheme.
Further, post-Brexit, all UK businesses who import goods from the EU will suffer a cashflow disadvantage on the move from EU-acquisition VAT to import VAT. The UK government has, though, said that there will be a solution that would avoid this cashflow disadvantage.
Following Brexit, if a UK business incurs a business expense in the EU for which they want to claim a VAT refund (Eighth Directive claim), they will have to file a paper-based application as the current electronic system is only available for EU businesses. In addition, individual EU countries can make the granting of such refunds subject to reciprocity, requiring an arrangement with HMRC.
The draft UK-EU Withdrawal Agreement contains detailed provisions dealing with transitional VAT issues including:
- a rule to ensure that the Principal VAT Directive applies to goods which are dispatched before the end of the implementation/transitional period and arrive afterwards; and
- a specific “wind down” provision in respect of cross-border supplies which took place before the end of the transition period. Rights and obligations in respect of those supplies under the Principal VAT Directive will continue until 31 December 2025, except Eighth Directive claims (31 March 2021) and amendments to the EU MOSS regime returns (31 December 2021).
The protocol to the Withdrawal Agreement contains a backstop to deal with the Irish border. Unless another solution is found beforehand, from 1 January 2021 Northern Ireland will be required to remain aligned to EU VAT rules for goods, although it will remain part of the UK's VAT area.
EU directives govern many aspects of the taxation of cross-border corporate transactions. These directives aim to reduce obstacles for businesses operating within the EU, to facilitate mergers and intra-group transfers of assets and shares, and to lay down rules on the taxation of group profits and withholding taxes on payments of interest and royalties.
Following Brexit, these rules will no longer apply, although the UK may negotiate bilateral treaties with individual countries to replace them.
UK businesses would still have the benefit of the extensive double tax treaties with other countries.
The UK Government has already confirmed that following Brexit it will not in UK domestic law reverse the effect of CJEU decisions on aspects of the UK Stamp Duty and Stamp Duty Reserve Tax rules, which were held contrary to the EU Capital Duties Directive (affecting "season ticket" charges for clearance services and depositary receipts systems).
Social security contributions for internationally mobile employees
The UK is currently part of the EU social security contributions system. As such, a UK worker who works in another Member State is liable to pay the social security contributions of that Member State only (and vice versa for Member State workers who come to work in the UK).
Following Brexit, that system will no longer apply and workers may be liable to double social security contributions in both the UK and the other Member State, unless the UK signs up to the EU system as a non-Member State, as Switzerland did recently.
International tax policy and BEPS
Under the protocol to the UK-EU Withdrawal Agreement, from 1 January 2021 the UK has agreed to abide by certain "level playing field" measures to ensure fair competition. These measure include EU State Aid rules, which currently apply to UK tax regimes such as EMI options, R&D tax reliefs and creative industries tax reliefs.
Further, under the Protocol the UK will also apply global standards on transparency and exchange of information, fair taxation and OECD-BEPS standards.
The UK will also continue to apply UK domestic law that transposed EU Directives on exchange of tax information, anti-tax avoidance and country-by-country reporting.
If the UK leaves the EU on 29 March 2019 without a Withdrawal Agreement that provides for a transition period, the customs duties will be subject to WTO rules. This may result in customs duties on imports of certain goods from the EU where no duties existed before. Border customs checks would also apply.
If the UK-EU Withdrawal Agreement enters into force, the UK will remain part of the EU Customs Union until at least 31 December 2020, which would mean no customs duties, quotas or rules of origin checks.
The protocol to the UK-EU Withdrawal Agreement envisages that a single EU-UK customs territory would be established at the end of the transition period (31 December 2021) and last until the future UK-EU relationship applies.
The post-transition period EU-UK single customs territory would comprise the EU customs territory and the UK customs territory. This would mean that the UK would align its tariffs and rules of origin to those of the EU; meaning that there would be no tariffs, quotas or rules of origin checks between the EU and the UK (except for fishery and aquaculture products).
The UK would in those circumstances also harmonise its commercial policy with that of the EU's to the extent necessary to successfully operate the single customs territory. However, one change would be that the UK would represent itself, including Northern Ireland, at the WTO.
Under the protocol, from 1 January 2021 Northern Ireland would remain subject to The Union Customs Code (unless before then an agreed solution different to that in the protocol is found).
What can businesses do to prepare?
As well as considering the potential longer term changes post-Brexit, businesses need to ensure they understand what the consequences would be for them in a "worst case" scenario that the UK leaves the EU on 29 March 2019 without a transition agreement – and make any plans needed accordingly. As such, you should:
- Assess whether you use the UK as a gateway to the EU. If so, will Brexit have an impact on your tax structuring or supply chains?
- Consider whether any of the immediate VAT consequences of Brexit (particularly in a no-deal scenario) would affect your business.
- Review whether the direct taxes Directives ceasing to apply will impact your corporate/business structure or planned cross-border corporate transactions.
- Consider whether currency fluctuations during the transitional period may cause unexpected tax charges.
- Stay abreast of developments in the UK tax code for the post-Brexit period, including any changes to the UK VAT regime and direct taxes.