Regulated businesses, particularly those in the financial sector, have been working on their Brexit contingency plans for some time. Many other businesses may have been relying on the prospect of a transitional period extending to the end of 2020 before finalising their plans allowing time to implement any structural changes. But with the uncertainty over any withdrawal agreement continuing, such businesses can no longer afford to discount the possibility that the UK will crash out of the EU without a deal on 29 March 2019.
With that in mind, we have set out below our checklist of some of the key tax-related matters that finance and tax directors should be considering before Brexit day.
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 with 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 but can only do so after 29 March 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 April 2019 for sales made between 29 and 31 March 2019.
- Consider the impact of no-deal statutory instruments
The impact of changes brought about by a number of recent statutory instruments which are to take effect on 29 March 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 will be to extend 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) .
- 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).
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.
- 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.
- Without a deal the Directives will no longer be available for payments by and 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.
- If treaty relief is not available, identify the cash flow costs and whether any steps can be taken to reorganize payment flows etc. to mitigate them.
- Consider whether or not it may be beneficial to make an election under s931R CTA 2009 to UK 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.
- Reorganize 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 or 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 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 the exception for EU resident companies that can demonstrate valid economic reasons for their establishment.
Previous transactions and reorganizations
- Identify past transactions and reorganizations involving UK companies which have relied upon reliefs based on EU law which maybe 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 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 he migrating company ceases to be resident in an EU member state.
Current group reorganizations
- Complete on-going reorganizations before Brexit day. UK companies will not be able to benefit from certain reliefs after Brexit day, for example, transactions which rely upon the EU Mergers Directive or the Cross Border Mergers Directive.
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 obligations 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).