If the UK cannot negotiate remain in the customs union or in the EU VAT area under a no-deal Brexit scenario, firms can expect an increase in processing time and costs.
When assessing the tax impact of no-deal Brexit you have to look at the rules which are directly derived from the EU legal framework and those which are indirectly impacted. VAT, Customs Duties, State Aid and to some extent withholding tax (WHT) are the primary ones affected, but the changes to the transfer pricing (TP) rules coming out of the Base Erosion and Profit Shifting project (BEPS) may indirectly play an important role after Brexit, and to some extent Insurance Premium Tax (IPT). Following are some of the major items to be aware of coming out of a no-deal Brexit, however, this list is not meant to be exhaustive. If you have any specific queries, please feel free to get in touch.
VAT is subject to total harmonisation in the EU, even funds the EU budget, and in the case of a no-deal Brexit you can basically open the EU VAT Directive 2006/112/EC and replace anywhere it says, 'EU member state' with 'non-EU'.
The EU Mini One Stop Shop (MOSS) portal to report and pay VAT on sales of digital services - and now also goods - to private consumers in the EU will not be directly available out of the UK. UK-established businesses that wish to avail of the scheme would need to register for the non-union scheme instead.
The foreign VAT reclaim procedures within the EU that use electronic portals to ease the process, and EU limits with interest for time to refund, would no longer be available. The UK would instead need to use the pen and paper-based 13th Directive foreign VAT reclaim procedure. All of this will most likely result in companies using service providers – like ourselves – to assist with getting the VAT as it will be more difficult to manage in-house.
UK-established companies would not be able access to various simplification measures, for example, the EU triangulation simplification scheme system in place for chain supplies which results in the middleman not having to register and account for VAT all over the EU.
The so-called low value consignment relief (LVCR) would also go away, which means that goods below £135 sent into the UK would be subject to import VAT and as per the official guidance for parcels valued up to and including £135. A technology-based solution will allow VAT to be collected from the overseas business selling the goods into the UK. Overseas businesses will charge VAT at the point of purchase and will be expected to register with an HMRC digital service and account for VAT due.
Both in respect of VAT registrations and foreign-VAT claims; UK-established businesses would, in a no-deal scenario, have to register through a resident fiscal representative for VAT in most of the of the EU member states.
In respect of services, the so-called use and enjoyment criterion, which only applies for supplies to/from non-EU established companies, would apply to services from/to the UK and consequently reverse charge may no longer apply. Instead, there would be an obligation to register and account for VAT if the services rendered are deemed to be effectively used and enjoyed locally.
It is not all bad news though. The UK tax authorities have said that they will introduce postponed accounting so that the import VAT can be included on the next return, and thus reduce the negative cash flow impact. But that will not reciprocally apply for UK companies exporting to the EU, however, ECSL will no longer need to be reported. Banks and insurance companies that today are rendering their VAT-exempt services to the EU should be able to treat these as zero-rated taxable supplies and therefore increase their right to deduct VAT in the UK.
Another potential 'positive' is State Aid - a branch of EU competition law which is meant to prevent member states from giving subsidies and other aid. Even if it isn't 'tax' per se, it has in recent years been weaponised as an instrument to attack tax structures, so it is important to mention in this context. As a consequence of Brexit, the UK may in the future be free to grant state aid as it chooses, without interference from the EU.
Making Tax Digital
The UK tax authorities are introducing Making Tax Digital (MTD) on Monday 1 April 2019 which just happens to be the first working day after Brexit (29 March 2019). No, this isn't an April Fool's joke. MTD means companies need to keep their records in digital form and file the VAT returns digitally, which in effect means increased demands for close-to-perfect tax logic in their ERP and not much room for manual adjustments, and probably the first step to transactional reporting. All this means companies would have to alter their tax logic from the UK being an EU to a non-EU country, in the midst of the perfect storm. TMF Group has fully HMRC-certified software solutions that we offer for free, without any incremental price in the VAT return filings. And we are there to help you set it up and ensure your tax codes are correct.
The EU is a customs union as well as a single market and consequently, there are no customs duties within the EU territory, while member states share common external tariffs with third countries. If there is a no-deal Brexit companies may need to pay customs duties (irrecoverable) on goods exported to the EU, so it is worthwhile exploring any ways to alter current supply chains, any customs duties relief schemes that may be applicable and/or any reclassification of goods into lower tariff rates. It is up to the UK to determine how they want to treat imports, ie. what tariffs they want to apply, but it is likely to also result in direct costs going forward. In both cases there would be an increased amount of paperwork (import/export declarations, EORI number, INCOTERMS in place etc.) to be completed.
In the case of a no-deal Brexit there would also be changes to withholding tax applicable to interest, royalties and dividends paid between the UK and other EU states. Currently, many groups with EU operations may rely on the Parent/Subsidiary Directive or Interest and Royalties Directive to remove the requirement to withhold tax on payments to and from the UK. However, as these directives are also part of the EU legal framework, they would no longer be applicable and so companies would have to look at the individual tax treaties for relief. Even though the UK has tax treaties in place with all of the remaining 27 member states, not all of these provide a complete relief from WHT.
The new focus on TP coming out of BEPS is not an EU initiative but originates from OECD guidelines and so Brexit has no direct impact as such, however, indirectly any potential transfer pricing adjustments going forward will now also be subject to customs duties. Consequently, the financial impact will be multiplicatively larger subject to the tariff rate applied for the goods in question which is not to be underestimated. We therefore recommend companies review their TP documentation and supply chain as well.
Insurance Premium Tax
While IPT is an indirect tax and shares many similarities with VAT, the tax treatment of insurance premiums is not harmonised by the EU legal framework. This, therefore, is likely to mean that UK IPT will continue as it does now in a no-deal scenario. However, we may in the longer term see changes to UK IPT, particularly around the current EU 'Location of Risk' rules that could widen the scope of UK IPT and increase the yield. What is likely is in respect to the few IPT-related European Court of Justice cases that have had a bearing on the UK IPT legislation, which may cause legislators to re-consider the current position. The biggest connected issue is likely to be the predicted removal of the Freedom of Services (FoS) facility for UK insurers underwriting cross-border business and the impact on insurers having to seek new permissions for EU risks.
One of the likely UK IPT repercussions of the UK's exit from the EU and removal of the FoS facility would be the need for overseas insurers to, once again, appoint UK fiscal representatives, who historically were jointly and severally responsible for any UK IPT liabilities of that company.
Talk to us
In late 2018 when we canvassed the business community for our Brexit Snapshot report, 23% of business leaders said they had taken steps to ensure they continue to meet accounting and tax requirements in the UK and EU. 18% told us they have ensured adequate cash flow for VAT and inventory. In light of developments since, more firms should be taking these essential steps as part of their Brexit-readiness plans.
TMF Group's global tax consultancy solutions team is ready to help you work out what Brexit means for your business, and come up with the best solutions for you to navigate through the complexity.
Replay the webinar with Brexit Partners: How prepared is your competition?
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.