Tax Law and Brexit - Is your business affected by the changes?

Overview

Following the end of the transition period on 31 December 2020, which broadly provided for the UK to continue to be within the EU VAT rules, customs union, single market and subject to the jurisdiction of the CJEU, the Trade and Cooperation Agreement (“TCA”) sets out the basis for the future relationship between the UK and EU. The TCA was implemented into UK law by the European Union (Future Relationship) Act 2020 and took effect on 31 December 2020.The TCA is very light on tax content and focuses instead on customs duties applicable to goods. This article takes a high level look at the main areas of tax law that will be affected as a result of the UK exiting the EU.Businesses that are or may be affected by the changes including those who make cross UK-EU supplies of goods or services or (intra-group) payments of interest, dividends or royalties, should take advice as soon as possible.

VAT

Strictly, whilst the UK is no longer required to maintain a VAT system or adhere to the EU VAT Directive, given VAT generates around one fifth of the UK’s tax revenues the existing VAT system is expected to continue to apply in its current form for the moment, possibly with some specific changes in the future (e.g. to items which attract zero or reduced rates).The immediate change, however, will be that (1) the UK will be treated as a third country for VAT purposes by EU member states and (2) the UK will treat imports of goods in the same way as those supplied from outside the EU.This will mean that UK import VAT will be imposed on imports from the EU, though importers making taxable supplies of goods should be able to register for UK VAT (if they are not already registered) and apply for postponed VAT accounting so that any UK import VAT, and recovery of the same, are offset in the importer’s UK VAT return (meaning that no cash UK import VAT will in practice be due).UK businesses exporting goods to the EU should review their VAT obligations in the relevant EU member states, noting that the EU VAT distance selling rules will no longer apply, and consider whether they need to register for VAT in the relevant member states and/or appoint fiscal representatives.The EU mini one-stop shop (MOSS) simplification, which applies in relation to the supply of certain digital services to EU consumers will also cease to apply – further details are contained on page 7 of in this publication.

Customs duties/tariffs

Whilst the TCA establishes (with certain exceptions) zero tariffs, customs duties and quotas in respect of trade between the parties (imports and exports), this is subject to the (significant) proviso that the goods originate in the other party’s country (and the TCA includes detailed provisions on “rules of origin”). Goods moving between the UK and the EU which originated wholly in ‘third countries’, or which lose tariff-free origin by incorporating excessive ‘third country’ components, may nonetheless face duties and quotas.As the UK is now no longer a part of the EU Single Market and Customs Union, customs declarations for UK/EU trade will be required. Goods entering the UK from the EU will be phased in during the next six months to allow businesses to adjust to the changes of the TCA. This requirement to complete import formalities will be a significant change for UK businesses.Further, special arrangements apply to trade with Northern Ireland. These are not dealt with further in this article.

Intra-group payments of interest, dividends and royalties between the UK/EU

Very broadly, EU law provides that interest, dividends and royalties paid intra-group between companies based in EU member states are not subject to withholding tax.Whilst this position is expected to be preserved by the UK in relation to payments from a UK company to an EU recipient (and, in any event, the UK does not impose withholding tax on dividends), there is no obligation on EU member states to reciprocate for payments (of interest, dividends or royalties) made to the UK. Where the relevant EU member state subjects a payment of interest, dividends or royalties to the UK to withholding tax under domestic legislation (and no exemption is available), the position under the relevant double tax treaty with the UK (including in relation to any procedural formalities) will apply. In a number of cases this is expected to mean that payments from a group company based in an EU member state to the UK which previously relied on EU law to be free from withholding tax, may now suffer withholding tax.

Cross-border payments to the US that rely on US tax treaty relief by virtue of having a UK shareholder

Brexit may also impact the eligibility of certain entities that have UK shareholders to claim tax treaty relief under double tax treaties with the US. This is because many treaties with the US include a requirement that the non-US resident party satisfies a “limitation of benefit” test in order to qualify for benefits (e.g. a reduction to rates of withholding tax). To qualify, the party must meet one of several specified categories of person. One typical relevant category depends on shareholders of the entity qualifying as ‘equivalent beneficiaries’, which for these purposes means EU, EEA or NAFTA members. UK shareholders will no longer satisfy this condition.Social securityOutside of the TCA, the UK and the EU have also agreed on a Protocol on Social Security Coordination to take effect from 1 January 2021. This will govern the social security position of individuals who move between the UK and EU from that date. The Protocol largely replicates the current EU social security coordination regulations. Therefore, individuals will be subject to the social security legislation of one country only and the scenario of compulsory payment of social security contributions on earnings in more than one country should not arise. Contributions will generally be payable in the country where activities are undertaken, with special provisions for multi-state and detached workers.

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