The United Kingdom has officially departed from the European Union, with effect from 31 January 2021, after the world’s longest swan song. We know that the UK’s withdrawal from the EU will impact many things (Boris and his kippers come to mind), but today we look at what, if anything, Brexit will really mean for the UK tax regime.
Not too much really, is the good news, at least in terms of direct taxes. For tax, Brexit will have the most impact on indirect taxes such as Customs Duties and Value Added Tax. Prior to 31 January 2021, the UK was part of the consolidated EU VAT regime. This essentially exempted UK companies from having to register for VAT in each EU country in which they traded. Brexit will therefore mean that UK companies will likely now be required to register for VAT in each EU country in which sales take place. In terms of imports from the EU, the existing UK rules for imports from non-EU countries will apply to imports from the EU, with some changes. This means that UK VAT-registered businesses importing goods from the EU will have to account for import VAT, but may be able to do so on their VAT return, rather than paying it upfront upon the arrival of the goods at the UK border. UK VAT-registered businesses can continue to zero-rate sales of goods to EU businesses and the EU member states will treat the goods imported from the UK in the same way as for other non-EU countries i.e. import VAT and customs would be due upon arrival of goods in the EU. In addition, in the absence of a trade agreement with the EU, exports and imports will have significant customs duties accompanied by additional paperwork i.e. customs formalities and border checks.
As for the corporate and personal taxes, as the UK of course has its own sovereign tax regime, the tax environment will not be directly impacted by Brexit in terms of domestic taxation. However, there will be a trickle-through of indirect changes. The EU has a number of directives in place, aimed at harmonising or minimising tax on intra-EU transactions, in particular reducing withholding tax on flows within the EU. After Brexit, the various EU tax directives will fall away for UK companies, in particular the EU Parent-Subsidiary Directive which allows dividends to be paid by EU subsidiaries free of withholding tax, and the EU Interest and Royalty Directive which allows interest and royalties to be paid by EU subsidiaries without withholding tax.
Although the UK Government has confirmed that intra-group payments (from the UK to EU group entities) related to interest, royalties, and dividends will not be subject to withholding tax, there is no indication that the same will apply (or be reinstated) in terms of such payments from EU to UK group companies. Therefore, where dividends, royalties, and interest are paid from EU to UK entities, the withholding taxes can only be reduced under the relevant double tax agreements (“DTAs”). Whilst the UK does have an extensive network of favourable DTA’s, withholding taxes will still be higher than when the EU directives applied.
A silver lining comes in with a reduction of certain reporting requirements, ostensibly around tax transparency. Another EU directive, this one designed to give EU tax authorities early warning of potentially nefarious cross-border tax schemes and snappily named DAC6, will no longer apply to UK companies. DAC6 applies to cross-border tax arrangements that meet certain hallmarks and bears a big reporting burden. The hallmarks of nefariousness according to DAC6 are extremely broad as well as somewhat mind-bending, e.g. if one entity operates in another jurisdiction and creates a permanent establishment there, or else if an entity operates in another jurisdiction and doesn’t create a permanent establishment there (only civil servants could come up with this stuff), then the reporting obligations apply. As with all rules around reportable arrangements or blanket disclosure requirements, the intention is laudable, but the output is simply a massive administrative hassle, so life will now be easier for UK companies in this regard. So, in essence, the DAC6 style rules will be much simpler for UK companies, as the UK will now only enforce certain rules which require UK businesses to report arrangements falling within category D of the DAC 6 hallmarks, essentially arrangements that undermine the common reporting standard or disguise beneficial ownership.
So in a nutshell, that’s it! The UK has “taken back control” and can do whatever they want with their kippers, and keep using pounds rather than kilos. From the tax side, there’ll be more hassle and costs in terms of VAT, customs and withholding tax on flows between the UK and the EU, but less DAC6 reporting requirements.
Contact us if you’d like to discuss this or any of the other changes in the global tax landscape.