Brexit: 10 tax issues to be considered

On 23 June 2016 a majority of British voters decided to leave the European Union. Leaving the European Union will have major tax consequences both for UK and European businesses. The most predictable will be the implications on harmonized tax systems. Therefore changes in regard to customs and excise duties and VAT will be foreseeable. However, the anticipation of any amendments on income and corporation tax is much harder.

We have therefore identified ten important tax issues that need to be considered.

No 1: Free trade agreement

It is obvious that neither the UK nor major EU-member states such as Germany or France have an interest to raise trade barriers. For example the UK is Germany’s fifth biggest trading partner and therefore it is not hard to predict that there will be an agreement between the UK and the European Union. Some commentators favour a membership in the European Economic Area (EEA) alongside Norway, Iceland and Liechtenstein. However, this is not very likely. Like the EU the EEA guarantees free movement of goods, persons, services and capital. One of the main arguments of the vote Out Campaign was the regaining of control over their own borders. This claim is contradictory to the guarantee of free movement of persons in the EEA. For the same reason it is very unlikely that the UK will try to achieve a similar status as Switzerland. The agreement on the free movement of labour between Switzerland and EU/EFTA Member States would also undermine Britain’s claim to control own borders. Therefore it is very likely that there will be an individual Free Trade Agreement between the UK and the European Union.

However, nobody should be in doubt that a Free Trade Agreement can offer the same benefits as the common market of the EU. There will be customs borders between both the UK and the EU and even Free Trade Agreements allow custom’s restrictions to a certain extent. Norway for example can export only contingents of certain fish and fish products to the EU. If the custom quota is reached, the regular import custom duty comes into effect.

No. 2: British customs law

Since customs law is fully harmonized in the EU, Britain will be forced to introduce its own national custom’s laws. The UK is member of the World Trading Organisation (WTO) and World Customs Organisation (WCO) and will be an agreement partner of GATT (General Agreement on Tariff and Trade) and will therefore introduce a customs law which will have to be in line with these various agreements. It is unlikely that British custom law will be much different than the European system. However, there most probably will be differences in detail.

No. 3: Customs duties

Since both the UK and the European Union are interested in as little trade barriers as possible it is likely that tariff rates will be low or nil. It is likely that the UK and the EU will sign an agreement preferential to both parties. This means that goods with the origin of the UK or the EU can be imported on preferential tariff rates. However, there are drawbacks, first of all every im- and exporting company has to prove the origin of the respective goods. This requires certificates of origin and results in an additional administrative burden. If the goods are not of EU or UK origin normal tariff rates will be applicable.

No. 4: Customs formalities

More important than the introduction of customs duties will be the increase in formal requirements. Every transfer of goods to and from the UK will require one export and one import declaration. If goods should be transferred through the EU or the UK companies they will be forced to use special customs procedures such as:

• Inward processing
• Transit procedure
• Bonded warehouse
• Temporary use

Example: A British company transports a machine to a German repair facility. After the repair is complete the machine should be exported to the UAE. In order to avoid import duties in the EU the Inward processing procedure can be used.

However, using such a customs procedure increases the administrative and financial burdens on companies.

There are various other customs formalities which may complicate trade between the UK and the European Union.

No. 5: Value added tax system

Value Added Tax is one of Britain’s biggest tax revenues. Therefore it is inconceivable that Britain will abolish VAT. It is also unlikely that Britain will introduce a totally new tax system. The regular tax rate will also remain within the EU-wide bracket of 15% to 25%. However, Britain might introduce new zero or reduced rates on certain goods which are prevented by EU-rules so far. On the other hand Britain may also introduce new sales taxes.

No. 6: VAT changes for companies

The system of intra-community acquisition and supplies will be replaced by those for import and export. This requires administrative changes in regard to proof, documentation, declaration, editing invoices and other formal requirements and the same applies for services.

An intra-community supply results in a tax burden and a recoverable import-VAT in the same moment. In the future import-VAT will be charged if goods are imported. This import-Vat might be recoverable. However, there will be a possible ‚painful‘ period between paying the import-Vat and recovering it which might result in additional cash flow costs.

No. 7: Excise duties

It is unlikely that Britain will abolish its regulation concerning excise duties on energy, alcohol or tobacco or change the system fundamentally. However, the UK would not be bound to minimum rates. It could also introduce new taxes on other goods.

Companies importing or exporting goods to and from Europe have to change intra-community supply rules by import or export rules.

No.8: EU law

In the future Britain will not be obliged to comply with primary or secondary EU law. Primary EU law is based on the fundamental freedom rights such as free movement of goods, persons, services and capital. Such cases in from of the European Court of Justice (ECJ) with British origin were Cadbury Schweppes, Marks & Spencer, ICI and Philips Electronics.

Secondary law in the field of corporation tax are the following directives:

• Parent-Subsidiary Directive
• Interest and Royalties Directive
• Merger Directive

It is unlikely that abolishing EU freedom rights and tax directives will be in favour of UK or EU based companies.

No. 9: State Aid Rules

Article 107 TFEU (Treaty on the Functioning of the European Union) bans state aids. In the future the UK will no longer be bound by State Aid Rules. This could result in more favourable tax regimes to encourage foreign investment.

No. 10: Social security

From 2010 on EU Regulation No. 883/04 and Implementing Regulation No. 987/09 have been in force. These regulations regulate which social security system is applicable if staff are assigned abroad or employees work in more than one EU/EEA-member states or Switzerland. The general rule is that a person can only be subject to a social security system of one member state. Dual liabilities or no liability at all are impossible.

Similar results could be achieved by bilateral agreements between the UK and EU-member states. However, since the UK has only one social security convention with Ireland it seems more likely that it might opt to stay within the boundaries of the respective EU regulations.

Author: Peter Scheller, Steuerberater – Master of International Taxation

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