The UK is due to leave the EU on 31 October 2019. The Government’s position remains that it will do so, with or without a withdrawal agreement. Whatever the outcome of the current unprecedented political events, there will be tax implications for UK businesses doing business in or with EU member states.
Direct tax implications of setting up business in an EU member state
Many UK businesses already have a presence in another EU member state. However, others may be considering setting up in the EU for the first time, due to Brexit and/or a variety of other commercial reasons. Setting up outside the UK will, of course, have tax consequences. For companies, any new corporate entity would be expected to be subject to corporate income tax in the EU member state in which it is resident. The tax rules and rates will differ from those for the UK.
Cross-border transactions with a subsidiary in an EU member state will have tax implications in both the UK and the relevant EU and other states in which it has a taxable presence. Matters requiring consideration include:
- how profits will be repatriated to the UK – dividends received by UK companies are usually exempt from UK corporation tax but interest on debt is taxable;
- whether and to what extent cross-border payments will be subject to withholding taxes – impacted by domestic law in the relevant member state, any relevant double tax treaty and, for the time being, certain EU directives which can alleviate withholding taxes on cross-border payments;
- if withholding taxes are suffered, will there be scope to offset such payments against UK corporation tax liabilities; and
- whether the transactions will be within scope of transfer pricing rules in the UK or other relevant jurisdictions – which broadly require all related party transactions to be made, and documented as being, on commercial terms.
Further considerations include whether any overseas subsidiary is within scope of the UK controlled foreign company regime, which could apply a UK tax charge on profits already subject to tax in the member state in which it is resident (albeit that double tax relief may be available).
Companies and unincorporated businesses expanding into the EU through a fixed place of business in an EU member state, but without a new corporate entity, will face many of the same, and some different, challenges.
In addition, it may be necessary to source employees in the overseas location, who would be subject to local payroll taxes and social security charges. If seconding existing UK staff outside the UK, the personal tax position of such staff may also be impacted.
Indirect tax implications of cross-border transactions following Brexit
The highest priority for UK VAT registered businesses exporting or importing to the EU is to make sure the organisation has a UK issued Economic Operator Registration and Identification (EORI) number. On 21 August 2019, the Chancellor announced that HMRC would automatically allocate an EORI to more than 88,000 VAT registered organisations and send them a letter confirming this allocation. It is important that organisations check whether they have been registered.
UK businesses selling goods to EU-based VAT registered customers will also need to prepare. In particular, we recommend that these businesses contact their customers to verify who will be responsible for importing goods into the EU.
Those bringing goods into the UK from the EU will face further customs declaration responsibilities and this could introduce delays to certain deliveries, at least temporarily. Depending on the commercial pressures and capacity within the business, importers will need to decide whether to undertake these additional obligations in-house or instruct an agent to act on their behalf.
UK-based service providers to EU consumers that account for EU VAT using the Mini-One-Stop-Shop (MOSS) scheme should consider registering for the non-EU scheme in a suitable member state.
Finally, those selling goods to consumers in the EU may currently use the distance selling regime to account for local VAT, but on a no-deal Brexit these registrations will be terminated. This means that either EU consumers, or, if the appropriate terms can be agreed, logistics providers, will have to account for local VAT and duty.
So what next?
At the time of writing, the terms and timing of the UK’s departure from the EU remain unclear. However, businesses should take appropriate actions to ensure they are as prepared as they reasonably can be for all likely scenarios, so that they have as much commercial protection as possible from any adverse impacts of Brexit and can benefit where opportunities arise.