In Brief

Tax Implications of the Brexit Deal

March 11, 2021
Tax Implications of the Brexit Deal

[Register for our Navigating the Post-Brexit Landscape webinar for detailed coverage of the tax implications of Brexit and related business considerations and opportunities.]

After a lengthy negotiation period, the U.K. and EU signed the EU-U.K. Trade and Cooperation Agreement (TCA) on Dec. 30, 2020. Now that the U.K. is no longer part of the EU single market and customs union, businesses and advisers in the U.K. and the EU must assess the various tax ramifications, complications, and opportunities presented by Brexit.

When did Brexit come into force and what was the “transition period”?

The withdrawal treaty under which the U.K. ended its membership of the EU on Jan. 31, 2020, included a transition period extending to Dec. 31, 2020, during which existing terms of the relationship would stay in place and negotiations with Brussels would continue to determine what the structure would look like beginning Jan. 1, 2021.

The U.K. terminated its EU membership roughly 3 1/2 years after holding a referendum on the matter, on June 23, 2016, which followed a period of intense parliamentary standoff, even within the governing Conservative Party, over the U.K.’s relationship with the EU.

The referendum, called by then-Prime Minister David Cameron, came after a protracted series of negotiations in Brussels on details of the U.K. membership. It centered, among other things, on immigration, regulatory compliance, and cost to the U.K. The U.K. had never adopted use of the euro, with the pound sterling remaining the national currency managed by the Bank of England.

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What are some of the implications for indirect taxes?

Indirect tax effects are likely to be disruptive to operations, at least initially, because of the changes that impinge on the movement of goods and services, and other administrative actions taken by the U.K. government. When the U.K. and EU were both part of a single customs union, goods could move across the border free of import tariffs and declaration paperwork. (Note that Northern Ireland has a special status under the Protocol on Ireland and Northern Ireland. Although it is part of the U.K., it is treated as part of the EU for purposes of trade with the EU.)

Post TCA, businesses have a number of new complications to consider, including:

  • Customs: It is now necessary for businesses to submit import and export declarations when goods cross the U.K./EU border. Businesses may want to consider seeking a customs agent to assist in making the necessary declarations, said Robert Marchant, partner of VAT and Customs Duty Services at Crowe UK, during a recent Bloomberg Tax & Accounting webinar. While it is possible for a business to file its own paperwork, it requires training and technology to interface with tax authority systems. Errors in paperwork can result in goods being held up at port.
  • Tariffs and rules of origin: According to the TCA, there are zero tariffs or quotas on trade in goods between the U.K. and EU for goods that meet stringent origin conditions. But this means that “zero tariffs” only applies to goods which have their origin in the U.K. or the EU. Goods moving between the U.K. and the EU with origin outside the two entities may be subject to tariffs based on the point of origin. This potentially includes goods manufactured in the U.K. or the EU if they contain components that were imported from elsewhere. Rules of origin are complex, and companies may want to seek professional advice in assessing the “origin” of their goods.
  • VAT: U.K. companies wanting to import and sell goods in the EU must register to pay VAT in each country where they want to do business, if the company is considered an “importer of record.” This can become logistically complicated, depending on the number of countries in which the company wants to do business. Further, in some countries, the U.K. entity must appoint a fiscal agent. The U.K. also no longer has access to EU VAT simplifications, for example, with respect to triangular transactions, chain transactions, call-off stock and business-to-consumer digital supplies. All of these changes may require U.K. entities to increase their number of registrations and associated compliance requirements. In addition, the U.K. has introduced new rules for imports of goods valued at 135 pounds or less, sold to U.K. consumers. These rules require the overseas seller to register and account for the U.K. VAT.

What are the implications for direct taxes?

The direct tax implications of Brexit are more limited than indirect, in that the EU generally has no jurisdiction over direct taxation. However, as a result of Brexit, the EU Parent-Subsidiary Directive – which requires intragroup dividends within the EU to be paid without deduction of withholding tax – and the EU Interest and Royalties Directive – which requires the same in relation to the payment of intragroup interest and royalties within the EU – have both ceased to apply in relation to the U.K.

This should have little impact on payments from the U.K. to recipients in the EU. First, the U.K. does not impose withholding tax on dividends. Second, the exemption from withholding under the Interest and Royalties Directive, having been implemented in U.K. domestic law, remains in place unless and until the domestic legislation is amended.

At present, there are no plans for any such amendment. However, for intragroup dividend, interest, and royalty payments from the EU to recipients in the U.K., the EU payer must now apply the relevant domestic withholding tax rates of its jurisdiction, subject to any reduced rates that may apply under an applicable double tax treaty between the relevant jurisdiction and the U.K.

How does the Brexit agreement affect DAC6?

Post TCA, the U.K. tax authority announced that it will significantly reduce reporting under DAC6.

The EU’s DAC6 directive covers the mandatory disclosure and automatic exchange of information among EU states in the field of taxation related to reportable cross-border arrangements. To be reportable under DAC6, a cross-border transaction must fall within at least one of five categories (Hallmarks A to E). However, the U.K. government has now amended domestic legislation to limit the application of DAC6 to arrangements that meet Hallmark D (essentially, arrangements that either have the effect of undermining reporting requirements under agreements for the automatic exchange of information or involve opaque offshore structures that obscure the identities of beneficial owners and have no economic substance).

The U.K. government has also stated that it intends to introduce legislation in  to repeal DAC6 legislation and implement instead the OECD model Mandatory Disclosure Rules

Experts say this is not necessarily a sign that the U.K. has pulled back on intermediary reporting entirely. Additionally, the TCA commits both parties to “good governance in the area of taxation, in particular the global standards of tax transparency and exchange of information and fair tax competition.”

What key steps should U.K. businesses and their counterparties take to prepare and adjust?

If they have not already done so, companies should evaluate all cross-border relationships for insight into the anticipated legal and regulatory framework that will apply in the new environment. Keeping in close touch with counterparties and suppliers in EU countries and focusing on arrangements aimed at maintaining stability of supply chains is key.

Firms also should prepare for the added cost of adapting to new accounting and reporting procedures. Additionally, there will be extra expense associated with changes to freight and customs driven by the U.K. government’s Smart Freight system (a new computer system that will require hauliers to file information electronically and receive approval before traveling toward the U.K.-EU border). The associated paperwork for the new system is estimated by the government to cost 13 billion pounds per year in aggregate.

As businesses begin to navigate the post-Brexit world, flexibility and resiliency will be critical.

Businesses should also stay alert to opportunities in the post-Brexit landscape. For example, setting up warehouses in Northern Ireland, which has a special status, may enable U.K. businesses to continue to access some of the benefits of EU membership.

[For the latest updates and information on cross-border tax issues, visit our international tax resource page.]

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