Brexit... Business taxes

What are the tax challenges after Brexit for individuals and companies, and what new processes will be required for importing and exporting goods and employing individuals in the EU?

We start by looking at VAT, withholding tax and social security.

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What are the VAT implications if we don't reach an agreement with the EU by the end of the transition period?

The UK will not be required to retain VAT after the end of the transition period (on 31 December 2020). However, it is understood that the UK government has no intention to repeal the VAT regime, and that the existing rules will continue in the much the same way. Of course, aside from the question of how the Northern Ireland protocol in the withdrawal agreement will actually be implemented, there will be practical knock-on effects. Key aspects, subject to the UK reaching an agreement to the contrary with the EU, are as follows:

• the VAT rules that will apply to supplies of either goods or services with the EU will be the same as those currently applying to supplies of goods and services with non-EU countries, albeit in Northern Ireland it is intended that EU VAT rules will continue to apply to the supply of goods between Northern Ireland and the EU (as opposed to goods being supplied within Northern Ireland, or between Northern Ireland and the rest of the UK);
• goods entering EU countries from the UK will be treated the same as those arriving into the EU from other non-EU countries, with associated import duties and VAT arising;
• the UK will stop being able to access EU systems, such as the EU mini-one stop shop (‘MOSS’) platform (meaning that businesses may need to consider registering for the portal in another EU member state), and the EU VAT refund system (meaning that VAT refunds will have to be sought using existing procedures for non-EU businesses).

Going forwards, the UK will have greater freedom to change the UK’s VAT regime. Therefore, it is possible that over time the UK’s VAT regime will diverge more and more from the EU regime, particularly with regard to the rates applied to particular goods or services.

What are the withholding tax implications on or after 1 January 2021 if there is no agreement with the EU?

As we know, the UK is no longer an EU member state, although it has continued to be treated as such during the transition period, which will run to 31 December 2020. Therefore, if no agreement is reached, from the start of 2021, UK tax resident companies may not be 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 the directives have been implemented into each jurisdiction’s domestic legislation. Payments out of the UK are not expected to be affected, but it is likely that many payments to UK companies from EU resident subsidiaries will be impacted. As such, UK companies should review current agreements and structures and consider what relief, if any, will be available under the terms of an applicable double tax treaty (and what applications will need to be made to obtain such relief).

What social security implications are there for employees working in the EU if no agreement is reached with the EU before the end of the year?

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. As a consequence, UK individuals who are working in EU Member States on 1 January 2021 (and thereafter) could well be subject to two lots of social security contributions, unless there is bilateral social security agreement between the UK and relevant EU member state. Even where such an agreement exists there could still be uncertainty as to which country has the relevant taxing rights. This change will also impact employers, particularly those that are currently taking advantage of the ability to send UK employees on short term secondments within the EU. Such employers are unlikely to be able to continue paying only UK secondary national insurance contributions and instead will have to pay social security costs in the relevant member state (which may be higher than those in the UK) and manage the associated compliance burden.

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