A change as significant as Brexit could not have happened without causing some disruption, and the subsequent completion of the trade agreement certainly did not help. The uncertainty caused by the new cross-border tax environment, changes in tax law and increased bureaucracy concerns companies. Other potential impacts remain unclear, for example the impact of new immigration requirements on UK companies. Companies are not sure what has already happened and what will not happen.
I have collected feedback from colleagues from our network on this subject to get their opinion on future challenges.
Tax changes – good news or bad news?
Changes in taxation are inevitable as the United Kingdom has lost the benefits granted by EU directives on subsidiaries and interest and royalty directives. These directives allowed companies to avoid tax deductions at source from payments between related companies in EU Member States.
This is no longer the case for UK companies which must now expect taxes at source on interest payments, royalties and dividends between UK and EU subsidiaries. Businesses should carefully examine the relevant double taxation agreements and re-examine cross-border payments between group companies.
Although the Brexit Agreement was presented as a duty-free trade agreement, it did not affect the inevitable changes in VAT settlement between the UK and the EU. In some cases, companies in the EU must now register and settle the UK VAT. The reverse situation also applies.
Jaspal Dhillon, VAT Director at Lubbock Fine explains: “The contract details refer to rules of origin, meaning that trade is duty-free only when goods come from Britain or the EU.
Where the goods come from another place or have no proof of origin, the companies shall be subject to customs duties.’ There is an additional complication associated with Northern Ireland.
To avoid the land border between Britain and the EU between Northern Ireland and the Republic of Ireland, there is a virtual border between Britain and Northern Ireland. Jaspal Dhillon comments: “Trade in goods in Northern Ireland between the EU and the United Kingdom involves additional and complex rules to consider.
EU VAT rules in the context of supply and movement of goods will continue to apply in Northern Ireland, despite the rest of the UK VAT system." To avoid unpleasant surprises, Jaspal Dhillon suggests that companies explore their supply chains: “We advise our customers to map their supply chains, identify the location of their suppliers and customers and, if necessary, consider simplifying existing solutions.
The VAT is operating in real time, so companies must take into account any VAT liability at the time of delivery. Companies should seek advice to ensure that they comply with the rules in the UK and the EU."
There are some concerns that the United Kingdom may take advantage of the opportunity to abolish certain concessions that were in force because of EU tax law, such as relief for cross-border losses
Derogation from EU tax law
Of course, Brexit means that Britain no longer falls under the jurisdiction of European courts. But is that good news for British companies? There are positives and negatives.
There are some concerns that the United Kingdom can take advantage of the opportunity to abolish certain concessions that were in force because of EU tax law, such as relief for cross-border losses.
On the other hand, UK parties may use Brexit as an opportunity to make the national tax system attractive to foreign investors, as the Brexit agreement seems to leave this option open. It is unclear whether and when Britain can take action. There is, however, one change that we can be sure of, namely the DAC requirements 6.
UK significantly reduced the scope of the DAC 6, a new mandatory reporting requirement for cross-border arrangements where there are signs of aggressive tax planning. Only arrangements to deviate from the common reporting standard or to conceal actual ownership will remain, otherwise the applicable OECD disclosure rules will apply.
This is a convenience that many will surely enjoy.
As far as VAT is concerned, Jaspal Dhillon sees the time when the United Kingdom will lay down its own VAT rules, which will create its own distortions: “After resolving international supply problems, the UK will be able to legislate VAT at its discretion, without restrictions on the part of the Directive, Regulations or EU courts.
There will inevitably be changes, a renewed interpretation of HMRC and British taxpayers and a multitude of litigation in connection with British VAT law."
Border checks — new paper requirements
In the run-up to Brexit, there has already been growing concern about the additional bureaucracy that new border controls will bring, and companies will have to adapt to urgent export and import requirements that have not existed for decades.
Mark Turner, a managing partner in Lubbock Fine, witnessed the frustration of customers: “For many British companies, including our customers, the most direct result after Brexit was the rise in bureaucracy. Those who import and export to Europe had to quickly study, understand and devote time to complicated new paperwork on both sides.
This inevitably caused early disruptions in the supply chain, exacerbated by restrictions Covid-19 And closing the borders. Our customers must also navigate after changes in VAT and new import duties.
At Lubbock Fine, we actively guide our customers through the transition, helping to settle VAT and other practical measures, such as setting up subsidiaries in the EU. ”
But border controls not only affect imports and exports; only time will show what the impact will be on people, both workers and investors.
The picture remains unclear as regards immigration and incoming investments, and the main problem is that the potential visa requirement and any related restrictions on worker mobility may adversely affect British companies.
Although the delay in the Brexit trade agreement left companies little time to prepare, Mark Turner is optimistic that the situation will soon improve: “Now that the final regulations have been published and the supply chains have begun to rebuild, we hope that British companies will quickly adapt to the new normality.
Brexit – European view
The influence of Brexit is felt not only in the UK, but also in the EU. Prof. Dr. Klaus-Peter Hillebrand, CEO of DOMUS AG, member company Russell Bedford in Berlin and director of the board Russell Bedford International for the EMEA region commented: “I am relieved that the Brexit trade agreement has finally come to fruition.
Chaos, which would cause an disorderly Brexit, was averted. However, new cooperation between Brussels and London will not be easy.
On the contrary.’ Klaus-Peter Hillebrand agrees that the trade agreement is much better than the absence of a trade agreement: “Great Britain is second The largest EU export market after the USA and no market is more important to it than the EU.
Free trade without duties and quantitative restrictions in the movement of goods will prevent many problems." However, Klaus-Peter Hillebrand foresees some difficulties: “Brexit inevitably involves more bureaucracy. Closer control of the movement of goods will cause problems even in well-established supply chains.
The new rules for economic cooperation will cost time and money both in the EU and in the UK. These are rough times. Brexit brings significant changes in taxes and corporate law, which for some customers may pose existential risks. The task of tax advisers is to help customers move through the Brexit jungle.”
Earlier version of this article appeared in the online magazine AICPA Financial Management, February 2021
About the author
Phil Moss London, United Kingdom
Phil is a tax partner in London's member company Russell Bedford, Lubbock Fine, a company offering a full range of services to auditors based in London City. He has extensive experience in advising private customers and companies managed by owners.
He specializes particularly in tax matters faced by the owners of companies with legal personality and persons without legal personality and other wealthy individuals. Phil advises in all tax areas, including the effects of selling the company in the field of capital gains tax.
He uses his knowledge and experience to help his customers implement the planning needed to reduce this exposure. He has extensive experience in the taxation of non-residents and non-residents and associated international tax planning.
PHILMOSS@LUBBOCKFINE.CO.UK AUTHOR: Phil Moss - Lubbock Fine, London, United Kingdom