Brexit... Corporate and commercial

Generally speaking, since 1 January 2021 the UK is no longer required to retain any VAT laws that are harmonised with those of the remaining EU Member States, except as regards movements of goods directly to or from Northern Ireland. UK VAT laws applicable to other dealings with goods (and any dealings in services) are now purely a matter for the UK.

In the short term, at least, the UK will retain a similar – but entirely separate – system of VAT laws. However, the UK will now have greater freedom to change the details of its own VAT regime (as demonstrated on 1 January 2021 through the immediate abolition in the UK of the EU’s compulsory minimum 5% VAT charge on sales of certain sanitary products). Therefore, it is possible that over time the UK’s VAT regime will diverge more and more markedly from the standard EU model, whether in relation to the rates of tax applied or to matters of principle (such as the general scope of the regime, or the methods adopted for computing taxable amounts).

The trade agreement reached between the UK and EU on Christmas Eve 2020 currently remains subject to formal ratification, although it is assumed that there will be no fundamental changes to the agreement at this stage. This agreement has little significance in VAT terms but it does prevent the levying of any separate customs duties (i.e. so-called “tariffs”) on any goods imported into the UK from the EU or vice versa, provided that the goods originate in either the EU or the UK. The agreement contains various detailed rules which determine whether goods should be regarded as originating outside the UK and EU for these purposes.

Except in relation to direct movements of goods between Northern Ireland and the EU, any movements of goods between the UK and the EU will be treated in the same manner as movements of goods between the UK and any non-EU territories. But certain services will no longer attract UK VAT when supplied from the UK to a non-business customer based in the EU. It was previously necessary to distinguish between EU business and non-business customers for UK VAT purposes but all non-UK customers of UK businesses are now effectively treated alike for VAT purposes. This typically means that UK VAT is no longer charged to non-UK customers of UK businesses, although some exceptions remain (for example, in relation to sales of UK land or the provision of UK construction services to non-UK customers).

It should also be noted that, as in the pre-Brexit era, the Isle of Man will continue to be treated as part of the UK for UK VAT purposes but the Channel Islands will not be so treated (although the Channel Islands do now form part of a single customs territory with the UK and the Isle of Man).

After the official Brexit date the UK effectively continued to be treated as part of the EU for tax purposes until 31 December 2020 but such treatment has now come to an end. The agreement reached between the UK and EU on Christmas Eve 2020 in relation to trade (and certain other matters) has no general application to cross-border payments of interest, dividends or royalties. This means that UK-based companies are no longer able to benefit from either the Parent-Subsidiary Directive (Council Directive 2011/96/EU) or the Interest and Royalties Directive (Council Directive 2003/49/EC). What this ultimately means for UK companies will depend on how these Directives have been implemented into the domestic tax laws of individual EU Member States. Payments from the UK are not expected to be affected in the short term (unless any relevant changes to UK tax law are announced in the UK’s forthcoming Budget on 3 March 2021) but it is likely that many payments to UK-based companies from EU-based affiliates will be adversely affected. As such, UK-based companies with EU affiliates should now urgently review current agreements and structures, and consider what level of tax relief, if any, will now be available under the terms of any applicable double tax treaties. Since most tax treaties do not apply automatically, it will also now be necessary to consider whether any new procedural steps will need to be taken in order to obtain any treaty reliefs.

The EU social security regulations, which many employers and employees rely on when they are working in another EU Member State, will no longer apply to most situations involving a UK employee and a non-UK employer, or vice versa. However, a broadly similar (but not identical) set of principles was included as a Protocol to the trade agreement concluded on Christmas Eve 2020. The Protocol covers both entitlements to benefits and obligations to make payments to a national social security system by or on behalf of an employee. Therefore, the essence of the previous EU harmonisation regime remains in place and (by means of collateral arrangements with the non-EU parties concerned) the concept of “the EU” is extended in this context to include EEA countries and Switzerland as well as the actual EU Member States. The Protocol potentially applies for 15 years (unless either curtailed or extended by subsequent agreement) and it covers newly implemented employment arrangements as well as those that began before the end of the transitional period. However, certain UK employment arrangements with an international element still potentially benefit from protection under ordinary EU social security laws on a transitional basis, even if the Protocol itself would not be applicable. The post-Brexit social security status of cross-border employment arrangements is complex where there is a UK element to the arrangements, and so careful consideration should always be given to the social security aspects of any new or continuing cross-border employment relationships involving a UK employer or employee.