The UK officially left the European Union (EU) at 11:00 pm on 31 January 2020. However, as part of the Withdrawal Agreement with the EU to help the UK transition away from EU membership, EU law continued to apply to the UK as if it were still a Member State until the end of 31 December 2020. On 24 December 2020, the EU and UK reached a Trade and Cooperation Agreement (TCA), which applies as of 1 January 2021. From this time, the UK and EU became two distinct regulatory, legal and customs territories.
The result of this is that there have been major changes to both the VAT and customs requirements for businesses operating in the UK and Europe. As well as that, structures need to be reviewed in the light of any Brexit restructuring of business models and in recognition that EU tax directives no longer apply to the UK. Businesses with mobile workers should also review the implications of the changes to social security arrangements.
Set out below are the top implications concerning tax which organisations should be looking at now that the UK is no longer part of the EU.
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Consider any tax impact of Brexit-driven restructuring
The impact of Brexit, even as tempered by the TCA, means that supply chains and/or group structures will need to be reconsidered and possibly restructured. The tax impact of any such reshaping of the group and its supply chains will therefore need to be considered.
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Check VAT registrations
Suppliers will need to check where they should be VAT-registered. While there are numerous caveats and exceptions, as a broad rule: (i) for those providing digital services to both EU27 and UK consumers, it may be possible to have only two VAT registrations: one under the so-called mini-one-stop shop and one UK VAT registration in the UK; (ii) suppliers of goods to consumers (and other "importers") will have to consider whether they need to separately VAT-register in each of the EU27 countries and the UK where they are selling/importing; and (iii) suppliers of B2B services may only require registration in the countries where they actually have offices.
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Review loss of the EU Interest and Royalties Directive and the EU Parent-Subsidiary Directive
The EU Interest and Royalties Directive and the EU Parent-Subsidiary Directive no longer apply from 1 January 2021. The possibility of withholding tax on interest paid from EU entities to UK entities should be reviewed and any new potential gross-up risk evaluated and allocated appropriately. The loss of the EU Parent-Subsidiary Directive may impact the tax efficiency of repatriating cash from subsidiaries to parent companies where a UK entity is included in the structure. Companies relying on these Directives should review the domestic law in the relevant EU country and the terms of the applicable double tax treaty with the UK to determine the withholding tax position in respect of interest, royalties and dividends payments, and identify any additional withholding tax costs. Applications to benefit from any treaty relief should be filed on a timely basis.
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Consider VAT recovery for financial and insurance service providers
The UK government has enacted legislation to enable businesses supplying specific services (i.e. certain financial and insurance services) to EU customers to recover their input VAT on costs associated with those supplies. Previously, this was only possible where these services were supplied to customers outside the EU. This change brings the post-Brexit VAT treatment of such supplies to EU customers in line with the ongoing treatment of supplies to customers in the rest of the world, with the stated aim of ensuring that UK companies will be able to compete for business in the EU on an equal footing with companies in other non-EU countries.
This is a significant benefit for financial and insurance service providers with EU customers and such providers should consider how to structure their supplies to maximise their input VAT recovery after 31 December 2021, including undertaking a review of any cross-border VAT grouping arrangements to optimise partial exemption positions.
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Review social security arrangements
The TCA contains provisions which ensure that cross-border workers are only liable to pay social security contributions to one state at a time. This is generally the country in which the relevant individual is working, although there are specific provisions (the "so-called detached worker" rules) under which, if an EU Member State agrees to apply the rules, UK workers sent to work temporarily in that state remain liable for UK social security contributions for the duration of their posting and vice versa for nationals of that Member State sent to work in the UK. Local payroll taxes may (subject to any protection under the relevant double tax treaty) also apply. Where employees are working abroad of their own volition (e.g. for COVID-19 reasons), the position may be different and should also be checked.
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Review processes for cross-border sales of goods
From 1 January 2021, all B2B sales of goods between the EU and the UK that were historically treated as zero-rated intra-EU acquisitions will (with only very limited exceptions) become standard-rated imports and exports and liable to import VAT. Businesses which carry out trading between the EU and the UK should clarify incoterms and who is acting as importer of record for customs duty and VAT purposes on all cross-border sales. They should also check supply contracts and consider including, to the extent possible, provisions dealing with documentary requirements for such imports and the allocation of VAT risk. Businesses will also need to ensure they have processes in place to satisfy all related procedural requirements for such imports.
If you require further information or if you need tailored advice, please do get in touch with your usual Ashurst contact, or any of the people listed below.
