The die has been cast: 23 June 2016 marked a historical day in the history of the European Union. The British people have voted to leave the European Union. Alongside the political tensions in European politics, the Brexit will also have significant impact for European businesses operating in the British market. Although many things will be negotiated in the future the fiscal consequences of the Brexit can already be outlined. In this blog I will briefly address the most fundamental consequences of the Brexit from a tax perspective.
EU Customs & VAT: the UK becomes a ‘third country’
In business transactions with UK-businesses, businesses can apply the European system for intracommunity transactions in regard to goods (zero-rated intracommunity supplies) or the ‘reverse-charge-mechanism’ in regard to services. As soon as the Brexit has come into effect these business transactions will no longer qualify as intracommunity transactions but qualify as import and export. From an EU-VAT and customs perspective the UK will be considered as a ‘third country’, with all that this implies for the VAT-position of EU businesses active in the British market.
In case of import and export of goods from and to the UK, this requalification means that EU businesses must fulfill certain administrative obligations. For export this means, for example, an export declaration for customs. For VAT-purposes businesses should file evidence (correspondence, contracts, transport documents) for the Tax Office to prove that the goods actually left the EU and the zero-rate for export has been applied correctly.
For import, businesses need import-documents in order to determine the customs duties and import-VAT. Both customs duties and import-VAT are determined based on the customs value of the goods, which is usually based on the invoice amount stated on the commercial invoice.
With regard to the tax burden (customs duties and VAT), it is expected that the negotiations between the EU and the UK will result in adequate agreements that prevent a substantial increase of the tax burden for businesses operating in the British market. What should be considered though is an increase of the administrative burden related to import and export of goods from and to the UK. This may in time influence the terms of delivery and the cost price of your products.
For services, the Brexit could result in the fact that businesses can no longer apply the European reverse-charge-mechanism with regard to services performed for businesses in the UK. When EU-businesses perform a service for a UK-business, the service is usually taxed in the UK (unless an exception rule applies). Under the current system EU-businesses can reverse-charge the VAT to their British customer. Once the Brexit has become effective EU-businesses may need to calculate VAT on their invoices and register in the UK for VAT-purposes to transfer the VAT to the British Tax Administration. This administrative burden could in practice be experienced as an impediment to doing business in the UK. It is therefore desirable that the UK maintains a reverse-charge-mechanism for international trade in their national laws.
(Corporate) income tax: double taxation looming?
EU-nationals receiving British income, either from a pension or employment, can no longer rely on the European safeguards against double taxation. EU-businesses with head offices or subsidiaries in the UK can no longer rely on the EU Parent-Subsidiary Directive (PSD) or the EU Interest-Royalty Directive to prevent a withholding tax on outgoing UK-dividends or UK-interest- and royalties. This may in certain EU-states, lead to double taxation. From a Dutch perspective we regard the risk of double taxation to be insignificant as The Netherlands has an extensive tax treaty network and national regulations (double tax relief in (corporate) income tax) that prevent double taxation. The exact fiscal consequences remain uncertain and will largely depend on what will be negotiated in the coming months.
With our UK-colleagues of the PrimeGlobal network in the UK, we are always able to advise the best solution to your specific situation.