What does Brexit mean for UK business tax?

Specialist Helen Brown on the taxing implications for cross-border transactions following the EU departure of the UK.

There are many uncertainties surrounding Brexit and with the current exit strategy unclear

The continued ambiguity surrounding Brexit is an issue that is affecting many different businesses in a variety of different ways, and the international tax implications of Brexit should also be considered.

There are many uncertainties surrounding Brexit and with the current exit strategy unclear, if your business carries out work in the European Union, it is worth considering the taxation consequences Brexit could have for your business.

Currently, where profits are distributed – for example, by way of a dividend – by a subsidiary company in one member state to a parent company in another member state, no withholding tax (WHT) is applied to the profits distributed, provided certain criteria are met. This is called the Parent-Subsidiary Directive.

As well as this, there is also the EU Interest and Royalties Directive, where any interest or royalties can be paid between two member states without the requirement to withhold tax.

If there is a no-deal Brexit, the benefits of these directives may be withdrawn, which could result in WHT being applied to these transactions. If this is the case, companies would have to check the domestic tax legislation of the relevant EU country to determine if WHT is applicable. If under the domestic tax legislation there is WHT to be applied, the next step would be to check if there is a Double Tax Treaty (DTT) between the relevant countries.

The DTT may result in a lower rate of tax, but if the transactions are taxed under the domestic tax legislation, and the DTT does not reduce this to nil, then potentially the business will be exposed to a new additional tax cost, which may prove challenging to mitigate.

For example, a payment from Italy to the UK, post 29 March 2019, may no longer benefit from the EU directives and would be taxed at a higher rate under the tax treaty or domestic legislation, depending if certain criteria are met.

This could result in higher tax costs for groups and tax leakage if not properly planned for.

Social security is another obstacle that employers could face when their employees are working in the EU.

The existing position for a UK national working in the EU is that the individual will only be liable for social security in the UK if they have secured an exemption certificate.

Post Brexit, there is a risk the exemption will no longer be recognised, which could result in an additional social security burden on the employee and employer.

As well as considering the implications for direct taxation, attention should also be paid to the indirect tax implications of a no-deal Brexit. Here is a short summarised list of considerations...

Any movement of goods between the UK and EU countries would require presentation of import and export customs declarations.

Tariff rates for imports into the UK will be set on a non-preferential basis using the “most-favoured nation” tariff schedule of the World Trade Organisation (WTO).

A no-deal Brexit would bring limited changes to the VAT treatment of cross-border transactions. However, UK businesses would lose the benefit of some of the EU simplification rules on VAT, resulting in a requirement to register for paying the tax in an EU member state.

To avoid the cash flow cost of import VAT, this will be reported on VAT returns rather than being paid at the port. This will apply to imports from EU and non-EU jurisdictions.

It is understandable that businesses are confused with the lack of information, and therefore it is necessary for companies to watch closely the details of the negotiations for Britain’s exit from the EU.

It is also worth them engaging with professional advisors who have particular expertise in helping companies understanding their taxation exposure when operating overseas, regardless of the size or developmental stage of the organisation.

Helen Brown is International Tax Director at Anderson Anderson & Brown