Overview
Sarah Gabbai, attorney at law firm McDermott Will & Emery, said:
“The UK’s status as a “third country” from the EU’s perspective inevitably means the EU will no longer be obliged to confer Directive-based tax exemptions on the UK as of 1 January 2021. That said, the UK will technically be free to repeal any retained EU law it doesn’t wish to keep anymore, which could, at least in theory, pave the way for a more simplified VAT system of lower rates and a broader base; though it very much remains to be seen whether the UK Government will eventually go down this road. However, one does get the sense that the UK Government seems to be cherry-picking EU-derived tax rules to close down perceived tax advantages, as we have seen with DAC6, ATAD-related amendments, and State Aid rulings that affect the UK.
Aside from a general commitment from both sides to uphold international taxation standards on exchange of information, anti-BEPS rules and tax transparency, the new trade agreement itself has little to say about direct taxation. As such, not much will change as far as direct taxation is concerned, although leaving the EU will mean an increase in EU withholding tax costs for UK businesses with EU operations unless a treaty is available to reduce or eliminate them. Relocating operations from the EU to the UK could also become more costly, as merger reliefs will no longer be available to shelter any capital gains arising as a result of the relocation; although where exit taxes are involved, the EU country in question should have payment deferral rules in place as a result of the Anti-Tax Avoidance Directive.
Where VAT is concerned, we expect that that many businesses will see no change, but certain sectors will see quite significant changes and additional compliance. The main VAT changes will primarily affect UK businesses with supply chains involving EU countries, or those that sell to EU-based consumers. For example, UK importers of EU origin goods will have to adjust to a new system of import VAT, although any related cash flow issues may be managed by applying for a duty deferment account or by accounting for the VAT on their VAT returns instead of paying import VAT at the border. Under the new trade agreement, goods moving between the UK and the EU should not attract customs duties at the borders, provided that they comply with the appropriate “rules of origin” requirements. That said, businesses could still face a raft of customs paperwork that will incur additional administrative cost and delays.
UK businesses that incur sales-related costs in the EU may find VAT refund claims more difficult than previously, since each EU country has its own criteria for issuing VAT refunds to non-EU claimants, and the process can take longer. Certain UK businesses may also find themselves having to register for VAT in the EU, such as those that provide B2C digital services under a MOSS scheme, or that currently operate distance selling arrangements. We expect that most businesses will use fiscal representatives to manage these processes.
Thanks to recent draft UK legislation, UK companies that have benefitted from a finance company exemption under the UK’s CFC rules as a result of unlawful state aid can also expect to have this exemption withdrawn during 2021, and to pay any corporation tax that would have been due but for the exemption. This exemption was deemed by Commission Decision (EU) 2019/1352 of 2 April 2019 to constitute unlawful state aid in cases where, broadly, the management of the loan assets used to generate the finance company’s profits, and any related risks, were being handled by senior UK-based employees. To collect the tax, HMRC will issue charging notices to all affected companies over the course of 2021, and the tax must be paid within 30 days. If the Commission Decision is revoked or annulled, regulations will be made to ensure that affected companies are refunded the tax previously collected, though the timing of this is currently unclear.
From a broader international perspective, the UK tax environment for holding companies should remain relatively generous compared to other jurisdictions despite Brexit, mainly due to the UK’s significant treaty network and the absence of a dividend withholding tax. Also, the UK’s absence from the EU may mean that the UK could seek to build on its existing influence at the OECD level, which could prove useful in the coming months, particularly for large UK-headquartered multinationals, for whom Pillar 2 will be a particular concern.”
