Brexit 3.0: Hope for the best. Prepare for the worst
Our checklist of some of the key tax-related matters that finance and tax directors should be considering before Brexit Day is set out below.
Payments of dividends, interest and royalties by and to UK companies
- Identify payment flows between UK resident companies and EU27 resident companies that rely on the EU Parent Subsidiary Directive or EU Interest and Royalties Directive for exemption from withholding taxes.
The Government has confirmed that the implementing legislation for the EU Interest and Royalties Directive will not be changed and so payments of interest and royalties made by UK companies that currently fall within the terms of the directive should continue to be free of UK withholding tax. Dividends paid by UK companies will remain free of withholding tax.
The same will not be true for many payments of dividends, interest and royalties which currently benefit from the Directives and which are made by companies resident in EU27 states to UK companies.
- Consider whether it will be possible to make a claim under an applicable double tax treaty to reduce or eliminate any withholding taxes that may arise without the benefit of the Directives and, if so, investigate the procedures that will need to be undertaken to claim treaty benefits.
Even where the Directives are no longer available for payments to UK companies after Brexit Day, the UK has a wide treaty network which, in many cases, may replicate the effect of the Directives or at least mitigate the consequences of the Directives no longer being available. But those treaty benefits will still need to be claimed.
- Consider whether or not it may be beneficial to make an election under s931R CTA 2009 to pay tax on dividends received.
UK double tax treaties with some EU27 states (e.g. Portugal) require dividends received by a UK company to be “subject to tax” in the UK in order to qualify for a reduced rate of withholding under the applicable treaty. Dividends received by a UK company will usually be exempt from UK tax but it is possible to elect to disapply the exemption and pay UK tax on dividends, which may be beneficial if it helps to secure a reduced rate of withholding under the treaty.
- If treaty relief is not available, identify the cash flow costs and whether any steps can be taken to reorganise payment flows etc. to mitigate them.
- Reorganise group structures to mitigate the consequences of UK companies ceasing to be EU companies.
The presence of UK companies in a corporate group involving other companies resident in EU27 states may break existing tax grouping relationships or consolidations. This could lead to a clawback of reliefs in prior periods as well as an inability to claim group reliefs or tax consolidation treatment in future.
- Ensure that the position of UK companies in groups does not adversely affect the ability of EU27 companies to claim treaty benefits under double tax treaties with the US.
The presence of UK companies in groups may affect the ability of companies in EU27 states to claim treaty benefits for example on payments to and from US companies (as a result of the limitation of benefits clause in relevant US double tax treaties).
- Review CFC rules in EU 27 states to determine if UK companies will become CFCs.
UK companies which are subsidiaries of companies in certain EU27 states (e.g. Spain) may no longer be able to rely on safe-harbours for EU resident companies that can demonstrate valid economic reasons for their establishment.
Previous transactions and reorganisations
- Identify past transactions and reorganisations involving UK companies which have relied upon reliefs based on EU law which may be clawed back when UK companies cease to be EU companies.
Legislation in EU27 states implementing EU Directives (e.g. the EU Mergers Directive) or fundamental freedoms under the EU Treaty may rely on a participant company being and remaining resident in an EU member state.
- Identify any companies that have migrated to the UK from an EU member state.
Once again, reliefs granted or tax deferrals on the migration may be clawed back in the EU member state from which the company migrated where the migrating company ceases to be resident in an EU member state.
Current group reorganisations
- Complete on-going cross-border reorganisations before Brexit Day.
UK company law rules which permit true cross-border mergers with EU companies – under which one company assumes all of the assets and liabilities of the other company and the other company is dissolved without going into liquidation – will be repealed from Brexit Day. UK companies will not be able to participate in EU cross-border mergers from that day.
The EU Mergers Directive, in very broad terms, requires the deferral of tax charges on many cross-border reorganisations involving companies in different EU member states where relevant assets and businesses remain within the scope of the taxing rights of an EU member state. The UK tax legislation which implements the EU Mergers Directive will be amended from Brexit Day so that, in theory at least, it will continue to extend to cross-border reorganisations involving a UK company and EU27 companies. However, there can be no guarantee that reciprocal changes will be made to the implementing legislation in EU27 states.
Customs duties and VAT
Importers of goods from the EU
- Apply for a EORI number
You will need an EORI (European Operator Registration and Identification) number to be able to trade goods with the EU. You can apply for apply for an EORI number online.
- Apply for a duty deferment account
Even if, post-Brexit, import VAT can be accounted for directly on the VAT return in line with the Government’s proposals, custom duties will continue to be payable at the time of entry of the goods into the UK. A duty deferment account may help to mitigate the cash flow costs. But you may need to provide a financial guarantee in order to obtain one.
- Engage a third party freight forwarder
You should consider the implications for your business of the process for filing import declarations and whether it might be appropriate to engage a third party freight forwarder to assist.
- Register for VAT on low value parcels arriving in the UK
Low Value Consignment Relief will be abolished for all parcels arriving in the UK, not just from EU27 states. All goods entering the UK as parcels from overseas businesses will be liable to VAT. For parcels valued up to and including £135 the importer will be required to register with HMRC and will receive a unique registration identifier which must accompany the postal packet. This procedure will not apply to goods that are subject to excise duty or declared for a special customs procedure. The Government previously announced that a technology-based solution should allow VAT to be collected from the overseas business selling the goods into the UK however, at the time of writing this is not yet available. Once details are released by HMRC, businesses will need to register on this online system to be able to account for any VAT due.
Exporters of goods to the EU
- Appoint customs and fiscal representatives in relevant EU27 countries
Businesses should familiarise themselves with the import processes in the various EU territories to which they will be exporting goods; certain territories may require the appointment of a customs or fiscal representative.
- Register for VAT in EU27 states
UK businesses selling goods in EU27 states will need to register for VAT in the EU27 states where their sales are made. Businesses should review the relevant rules in those countries to understand the filing, payment and refund mechanisms.
- Consider the effect of EU VAT refund mechanisms
Businesses should review the relevant rules to understand the filing, payment and refund mechanisms as the current EU VAT refund system will no longer be available.
Some member states can be notoriously slow at issuing VAT refunds under the non-EU refund claim mechanism. Businesses should review their supply chains to identify where the potential cash flow issues might arise.
- Monitor changes to the “place of supply” rules for services
If the existing rules were to continue to apply, input tax recovery may improve for input tax attributable to supplies of services made to EU customers. But the Government has said the input VAT deduction rules “may be changed” for supplies made outside the UK.
- Prepare to register under the non-EU scheme in order to rely on the Mini One Stop Shop (MOSS)
For digital services supplied to consumers in the EU, the place of supply will continue to be where the consumer resides. The UK MOSS will no longer be available for services electronically supplied to EU customers. Businesses that want to continue to use the MOSS system will need to register under the non-EU scheme, in another EU member state, but can only do so after 31 October 2019. However, the non-union MOSS scheme is available if a business registers by the 10th day of the month following a sale. Active businesses will therefore need to register by 10 December 2019 for sales made from 1 November 2019.
- Consider the impact of recent statutory instruments
The impact of changes brought about by a number of recent statutory instruments, some of which are to take effect on 31 October 2019 in the event of a no-deal Brexit or if direct effect of EU law ceases to apply in the UK need to be considered.
Broadly speaking, the effect of the statutory instruments that will take effect on 31 October 2019, will be to extend existing rules allowing input tax deduction in respect of certain financial and insurance services supplied to persons outside the EU to supplies to all non-UK persons. Such supplies currently only give the right to VAT recovery only where the recipient belongs outside the EU.
The statutory instrument to extend the VAT exemption to services of managing; (a) defined contribution pension schemes; and (b) certain types of closed-ended investment undertakings that do not invest wholly or mainly in securities (notably certain types of property investment vehicles) on Brexit Day has been revoked and replaced with a new statutory instrument that is expected to take effect on 1 April 2020 to provide added certainty to businesses and allow more time for the changes to be implemented. In the event of a no-deal Brexit, HMRC will exercise its statutory discretion to enable businesses to continue to exempt their supplies until the statutory instrument takes effect.
- Changes to the Tour Operators Margin Scheme (TOMS)
Whilst maintaining TOMS, the scheme has been updated to allow a supplier operating under TOMS to charge VAT at the zero rate if the designated travel service is to be enjoyed outside the UK (currently, zero-rating only applies if the service is to be enjoyed outside the EU).
Employment taxes - social security
Businesses with internationally mobile employees
- Review the social security status for any internationally mobile employees (into or out of the EU)
If the UK leaves the EU without a deal the current EU regulations that help ensure internationally mobile employees pay social security in only one EU state will cease to have effect in the UK. Whilst the UK has released legislation that attempts to allow the current rules to continue, this is entirely dependent on reciprocal action by the EU and has not been agreed. Businesses with mobile employees (into or out of the EU) will need to review the social security payment arrangements for all such employees.
Prior to the introduction of the current EU regulations, a more limited number of agreements were in place between the UK and various EU states, however these are nowhere near as comprehensive as the current EU regulations and may prove problematic (for example covering only short time periods or third country nationals). There are countries with which the UK has no such agreements.
This means that all international working arrangements will need to be reviewed to determine if a new social security obligation is triggered - this may result in necessary communication with employees, registration with tax authorities, payroll obligations and, in some cases, potential double social security obligations (in both the UK and abroad).