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After 46 years, the United Kingdom is braced for the impact of leaving the European Union. Brexit will inevitably have a significant impact on trade in goods and services not only with the EU but the rest of the world. The UK has negotiated a Withdrawal Agreement with the EU. This effectively sets out the details of the divorce and provides a transitional period until the end of December 2020 to allow for a new agreement for the future trading relationship with the EU. At the moment, the UK Parliament has agreed in principle to the Withdrawal Agreement but cannot agree on a timetable to implement this agreement into UK law, and there is a stalemate currently which is likely to lead to a general election. Looming over this remains the specter of a “no-deal Brexit,” where no transitional measures apply, and the UK moves directly to third country status with the EU.
The EU has now granted the UK an extension to January 31, 2020. On this date, the UK will crash out of the EU, unless the deal negotiated by the Prime Minister, Boris Johnson, and the EU Member States is agreed by UK Parliament and ratified, or an alternative deal is agreed or further time is agreed with the EU.
So Brexit is really just the beginning of a new chapter of uncertainty as to how the UK will trade with the EU and whether it will be able to secure any free trade deals with other countries, including the US. If the current EU Withdrawal Agreement is ratified by the EU Member States and the UK, there is a transitional period, where the UK will remain effectively in the EU, until December 31, 2020. It is hoped that the UK and EU will be able to agree on a future trading relationship but if it does not, then the parties may agree on a further extension to the transitional period of up to two years, or in theory the UK might still crash out without a deal at the end of the transitional period if no agreement is reached.
Brexit under the Withdrawal Agreement
During a transitional period, the UK’s trading relationship will remain unchanged, so goods and services may be traded freely between the EU and UK without the imposition of customs duties, and the VAT rules will remain unchanged. The UK Government has legislated for a number of significant changes to the VAT system, which we anticipate will be imposed in the event of a no-deal Brexit or may become a feature of the UK VAT system depending on the nature of any free trade agreement.
One potentially important tax implication that would arise on Brexit even under the Withdrawal Agreement is that the EU Parent-Subsidiary and Interest and Royalties Directives will no longer directly apply to the UK. Broadly, these directives remove taxes on dividend, interest and royalty payments between European group companies. This could impact marketplace and other tech businesses with operations in Europe. The degree of impact depends upon whether existing double tax treaties replicate the effect of these directives but also the domestic Brexit legislation of other EU member states since many member states are introducing legislation that seeks to address the impact of Brexit for taxpayers in their jurisdictions.
No deal Brexit
One of the key areas that will be impacted by a no-deal Brexit is VAT on imports and Customs duties. Because if after Brexit the UK is no longer in a customs union with the EU, goods imported into the UK from third countries will no longer be able to move freely into the rest of the EU without complying with customs formalities and paying VAT at the border. If your company, a branch or subsidiary in the UK, is responsible for paying import VAT and duties, new arrangements will need to be put in place to make sure that you can move goods from the UK to the EU and vice versa. The additional costs in terms of tax and time to cross the borders may need to be factored into the pricing of those goods.
Following a no-deal Brexit, the UK will put the onus on third country suppliers to pay import VAT on goods entering the UK at or below £135 (currently about $174). The £15 (currently about $19) Low-Value Consignment Relief will no longer apply either. This will have a significant impact on suppliers who use online marketplaces. Thought, therefore, needs to be given to the contractual arrangements between suppliers and consumers as to who is liable for the import VAT and customs duties.
Postal service operators can register and pay this import VAT and duties for suppliers, but we are hearing that this new procedure is likely to cause delays at the border when goods are entering the UK because of the massive increase in goods now having to comply with VAT and customs clearance. You should, therefore, make sure that you are ready to deal with this and have contingency measures in place. We anticipate that the UK is likely to implement this additional obligation on suppliers in the event that the UK is able to adapt its UK VAT system once it has left the EU.
More generally in relation to VAT, the UK says that it will maintain its VAT system which is currently aligned with that in the rest of the EU, but once the UK is no longer bound by EU law, there is greater opportunity for the UK to diverge and adapt its VAT system.
Outside of sales and other indirect taxes, in addition to the point about the EU directives above, other EU laws such as State Aid laws (used in recent years to challenge the contracting structures of marketplace businesses) and the overriding EU fundamental freedoms that have had a big impact on UK tax law, will no longer directly apply. This will give the UK the ability to take divergent approaches to the EU, although it is unknown yet whether that could be positive or negative for the tech sector.
What to prepare for: The tech sector and the gig economy is under massive pressure from taxing authorities. The UK is also responding to VAT efficient arrangements where services are from one country but delivered to consumers in another. If the UK leaves the EU without a deal (or in the longer term after the transitional period under the Withdrawal Agreement), the UK may become more attractive as there will be VAT advantages to making cross border supplies, particularly of financial services such as banking and payment type services.