Brexit: Taxing Times?

Boris Johnson has been Prime Minister for just over four weeks and the prospects of no deal are climbing, particularly as there are currently no ongoing negotiations between the UK and the EU. There are fewer parliamentary mechanisms that could block a no deal outcome now compared to in the run up to 29 March; opposition parties and some “rebel” Conservative MPs are exploring any methods possible, including a vote of no confidence with a caretaker government.

Most consider that the chance of the UK leaving without a deal is at its highest ever level, and we are at another peak of uncertainty for business.

Although the UK Parliament is in recess until 3 September, no deal planning is at the forefront of the Government’s agenda and the Civil Service is busy. There are already indicators on the tax side of the increased activity to come. For example, the Government has established an advisory panel on freeports and we’ve seen HMRC increase communications to business, sending individual letters asking about Brexit readiness, reminding business to check the Government’s guidance, and sign up for alerts.

What tax areas should business focus on now?

There has obviously been a heavy focus on Customs Duty: for companies with UK/EU cross-border supply chains the calculation and payment of tariffs, with the associated complex reporting and systems requirements, is prominent on the Tax Director’s agenda – often reaching the Board’s agenda for the first time. Even where the duty cost itself is not material, there will still be increased customs compliance obligations to meet, and tax teams are looking for innovative ways to manage the burden whilst keeping the cost down and the business moving.

As is often the case with VAT, the devil is in the detail – and there’s a whole host of changes that businesses need to consider, with potential impacts on both the VAT position and associated administrative requirements. Some sector-specific changes could materially impact companies’ VAT recovery positions, in a positive way.

There have been limited corporate tax changes arising directly as a result of the UK leaving the EU – the most significant of these are future withholding taxes on payments of dividends, royalties and interest between the UK and countries such as Germany, Poland and Portugal because relieving EU Directives will no longer apply.

In regulated sectors such as financial services, insurance, life sciences and broadcasting, many businesses have undertaken restructuring to enable continued access to markets across the EU, and there may be tax payable on the transfer of part of a business. For these sectors, attention is also turning to future tax models: new cross-border charges for services provided, say, by an old UK hub company to a new EU company will have transfer pricing as well as VAT implications.

I asked Daniel Lyons, Deloitte’s Head of Tax Policy, to share his insights on the tax authority approach in both the UK and EU27 Member States, and what Brexit could mean for future UK tax policy:

“As a general rule, HMRC is not making sweeping changes to tax law and policy as a result of Brexit – for example, exit taxes will still apply – albeit some application of current law to Brexit-driven changes may not be fully tested for a couple of years.

“HMRC is taking a consistent approach to transactions with EU and non-EU counterparties in the event of a no deal scenario. This has led to a number of positive outcomes for business from a VAT perspective, for example in a no deal scenario deferred import VAT accounting will apply to all EU and non-EU imports; VAT recovery will be allowed on supplies of many financial services to all non-UK counterparties (rather than just non-EU as now); and UK travel and other businesses operating the Tour Operators Margin Scheme will pay a reduced amount of VAT in relation to EU sales.

“Turning to the EU, a number of EU27 Member States have published guidance for businesses in relation to tax and some have legislated to avoid an immediate adverse domestic tax impact arising in a no deal scenario. For example:

• Belgium introduced a law where the UK is deemed to remain an EU Member State for corporate tax purposes for a transitional period, subject to reciprocity;
• Germany enacted a Tax Act in March 2019 that includes rules to prevent triggering an immediate tax charge in relation to historical German-UK company migrations or asset transfers;
• Italy enacted a law in May 2019 (applicable for 18 months from exit date) during which some Italian domestic tax provisions in force as a result of the UK’s membership of the EU would continue to apply.

“The impact that Brexit will have on future UK tax policy remains to be seen. The current draft framework on the future economic relationship commits to a level playing field for open and fair competition, covering relevant tax matters and state aid. But we could see reductions in corporate tax rates, and indeed other tax rates, to stimulate economic growth, and further R&D incentives to encourage investment. Of course, if there was a change in Government as a result of Brexit, we could see a complete change in direction of future UK tax policy.”

The UK government has already enacted a number of statutory instruments to ensure tax law is operational post-Brexit. These updates, along with HMRC guidance and related topics, can be found on our Tax Brexit Portal. A detailed overview of the key tax impacts of Brexit can be found in our tax technical paper here.

Brexit has wide ranging tax consequences for business, not all of which have been high up in the headlines. With the increased risk of a no deal exit, tax needs to be firmly on the agenda for every business’s Brexit planning, both to manage any immediate consequences for payments, forecasts, compliance or reporting – and also to ensure business is well positioned to influence and take advantage of any positive future tax policy changes.

For more information on Brexit you can contact our Brexit team directly at brexitsupport@deloitte.co.uk.