Tag Archives: Brexit

Are we nearly there yet? Where are we on our VAT Brexit journey?

The UK finally completed its exit from the European Union on 31 December 2020, after more than 40 years of membership. Despite the four and a half year build up, many businesses found it difficult or impossible to prepare, due to the lack of clarity over what, if any, trade deal would be agreed. The national sigh of relief on Christmas Eve, as Boris Johnson announced the deal, was swiftly followed by a Brexit hangover, leaving businesses to face the reality of a more complicated trading relationship with the EU. Five months into the UK’s new found freedom, the challenges facing businesses are finally becoming clear.

Trading in goods

Businesses trading in goods bore the brunt of the changes on 1 January 2021. Having left the EU single market and customs union, a customs border now exists between Great Britain (England, Scotland and Wales) and the EU. Northern Ireland has a special dual status under the Northern Ireland Protocol, where EU VAT rules for trade in goods continue, but UK VAT rules apply to services. Many businesses trading in goods with the EU are now having to apply customs procedures for the first time.

Building contractor supplies

Take an example of a UK building contractor, purchasing bathroom fittings from Italy. Prior to 1 January 2021, the UK contractor would have provided its VAT number to the Italian supplier and simply self-accounted for VAT on the goods through its UK VAT return.

The same transaction taking place from 1 January 2021 requires the goods to be cleared through customs by submitting an import declaration, including the importer’s GB EORI number. Submitting an import declaration and complying with customs procedures is not straightforward. Most businesses choose to use a customs agent to do this for them, which inevitably involves additional costs.

Incoterms

The question of who takes responsibility for customs matters is determined by the ‘incoterms’ agreed between the parties and is now an important feature of any cross border transaction involving goods.

Postponed Import VAT Accounting (PIVA)

Import VAT is payable on goods entering Great Britain and possibly also customs duty. For a VAT registered importer, import VAT can normally be reclaimed through the VAT return and, therefore, does not hit the bottom line. A new simplification, known as Postponed Import VAT Accounting (PIVA), means that VAT does not need to be paid at the time of importation, but can instead be paid and reclaimed through the VAT return. This is good for cash flow, but the importer must remember to ask their customs agent to request PIVA on the import declaration.

Rules of Origin

Unlike import VAT, customs duty is a cost and, therefore, needs to be factored into the price of the goods. Although the EU-UK Trade and Cooperation Agreement was announced as a tariff free deal, this is only the case where the goods have ‘EU origin’ or if they have a nil rate of duty based on the tariff classification of the goods. The rules of origin can be hugely complex and will be a concept that many businesses have not dealt with previously. For example, if the bathroom fittings in our example are partly manufactured in China, with some processing, packaging and labelling taking place in Italy, what is the origin of the goods? The answer to this question could make a significant difference to the amount of customs duty, if any, which is payable when the goods enter Great Britain.

The importer is responsible for providing proof of origin, which may be certified by the supplier or a self-certification based on the importer’s knowledge. This is likely to be an area that comes under greater scrutiny from HMRC in due course. Some importers may be storing up a problem by self-certifying, without fully understanding the origin of the goods, potentially leaving them exposed to unexpected duty costs.

Double Duty Costs

Another issue which is becoming increasingly prominent is the risk of double duty costs. Returning again to our example, customs duty paid by the supplier when importing the goods into Italy from China will be built into the price of the goods. If duty is payable again when the goods enter Great Britain, it adds to the price. There may be ways of preventing this, such as use of special customs procedures, but this requires careful planning and preparation.

The above highlights just a few of the issues facing businesses post Brexit. Wherever you are on the Brexit journey, we can help you to navigate the new rules.

Preparing your People for Brexit

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People businesses will face some unique challenges as we prepare for Brexit so I thought it would be helpful to look at how valuable human assets may feel and react to the eventual outcome.

Look beyond 29th March

Although everyone is focused on the 29th March, it is important for businesses to assess the impact that Brexit will have on their longer-term staffing needs. This is because the challenges and opportunities associated with Brexit could result in a skills gap which will, in all likelihood, be both more difficult and costlier to fill.

Businesses will therefore need to make efforts to retain existing staff, as well do all they can to attract and retain new talent. Companies must consider the impact that Brexit will have on freedom of movement, and how this could affect their business.

Helping your employees register for Settled Status

A company’s existing EU employees will need to register for ‘settled status’ (via the Home Office website) by June 2021. Communicating this to your employees and getting them to register now will give both individuals and businesses confidence and certainty about their employees legal status. Given that employees are a major cog in the business wheel, registering for ‘settled status’ will help assuage any fears that EU nationals have, and will also help to identify issues which could result in business disruption.

What about the impact on UK nationals?

Similarly, It is also possible that restriction of movement could impact UK nationals who travel to Europe for work once Brexit takes place. This could well result in increased administration, visa requirements and delays when crossing borders. Businesses should assess the financial and operational impact this could have on them, and plan accordingly.

The Competition for Talent

The competition for talent has been tough for several years, and it is going to become even tougher after Brexit. The UK is already facing a skills shortage in key areas, and it is possible that not only could overseas companies start to target UK nationals, but also that the trend of fewer EU citizens seeking work in the UK will become even more acute. Businesses must be clear that in order to continue to attract the best talent, they must ensure that not only are their remuneration levels competitive, but also that other company benefits, which enhance the company culture, remain attractive. That way businesses stand the best chance of attracting and retaining top talent.

New Skills?, New Offices?

All the above can result in the need for new expertise around compliance and other impacted areas, which could, in turn, create the need for your business to hire for new skills. You may also need to open new offices in both the EU and beyond, and for staff to speak a second, or even a third, language. All this can be both a costly and time-consuming process, so it is crucial that businesses consider whether their staff will have the appropriate skills once Brexit is upon us. Appropriate training for existing staff will be of some help and is a relatively quick solution. However, recruiting from outside will be more challenging.

What importers and exporters need to do in preparation for a no-deal Brexit

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Shore crane loading containers in freight ship

The clock struck midnight…Happy New Year!… and the clock continues to tick towards the 29 March 2019.

With the uncertainty as to what form Brexit will take, and the possibility that we may leave the

EU without a deal, there are 3 actions you need to take now if you import and/or export goods with the EU. That’s because on the 29 March 2019 there would be immediate changes to the way you trade with businesses in the EU.

The 3 actions you need to take now are:

1. Register for a UK Economic Operator Registration and Identification (EORI) number

If we currently prepare your VAT Returns, we can do this for you. Or you can do this online at www.gov.uk/hmrc/get-eori. You’ll need an EORI number to continue to import or export goods with the EU after 29 March 2019, if the UK leaves the EU without a deal. You will also need an EORI number before you can apply for authorisations that will make customs processes easier for you.

2. Decide if you need an agent

Decide if you want to hire an agent to make import and/or export declarations for you, or if you want to make these declarations yourself by purchasing software that interacts with HMRC’s systems. If you want to declare through an agent, you must contact one to find out what information they’ll need from you. If you want to make the declarations yourself, you will need to talk to a software provider to make sure that their software product meets your needs, depending on whether you import, export or both.

3. Speak to your those who transport your goods

Contact the organisation that physically transports your goods to find out if you will need to supply additional information to them so that they can make the safety and security declarations for your goods, or whether you will need to submit these declarations yourself.

Overseas businesses setting up UK subsidiaries

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With the Brexit deadline looming we are finding greater amounts of interest from overseas businesses wishing to set up in the UK. For some of these businesses (e.g. those based in the Republic of Ireland) the reasons for expanding into the UK are self-evident. Others come to the UK for more subtle reasons, such as benefiting from the relative weakness of Sterling.

Ease of company incorporation in the UK

Features of the UK landscape are the ease of company incorporation and the ability to have company directors who are all non-UK residents. When compared to the Republic of Ireland our 17% corporation tax rate is unattractive. However this does not appear to dampen the appetite for Irish businesses setting up subsidiaries in the UK.

Structuring for expansion into the UK

When considering expansion into the UK there are a number of decisions which have to be taken about structure. As identified in my blog on the development of the UK corporate tax landscape it is important to model the impact of financing on the UK results as well as modelling the quantum of any opening year losses.

Withholding taxes after Brexit

Typically Irish ownership would access the benefits of the EU Interest and Royalties Directive in order to avoid withholding taxes on intra-group interest payments. In advance of the UK withdrawal from the EU in 2019 the terms of the UK tax treaty may be more relevant and making it more important to register as a borrower under the treaty passport scheme.

As the UK does not have an outbound dividend withholding tax, our departure from the EU does not make dividend withholding taxes a concern. Although this may be efficient as a mechanism for the repatriation of profits out of the UK the impact of dividend income receipts in the home state would still need to be understood.

UK Boards and non-UK Directors

Many inward investment groups have non-UK directors on their UK Boards and this is a common mechanism to enable commercial control of the UK subsidiary by home state persons. Like many countries the UK has a concept of management of control for company tax residency and the impact of our domestic rules should be considered when determining directors numbers, residence and their powers.

Audit requirements

Even if the UK company may not be expected to be particularly large, one still has to consider consolidated accounts and their audit requirements in the home state. This may lead to obligations to audit the UK subsidiary and for the UK auditors to have tight reporting deadlines in order to fit in with group timetables. Typically our audit teams are required to audit the financial statements of the UK subsidiary which have been prepared under UK GAAP and provide GAAP adjustments for overseas parent consolidation. Although this is not necessarily relevant for investment from the Republic of Ireland it can be an important factor to timetable into UK work when reporting to other countries, such as the US.

Future visa requirements

No business is a success without the right people. Expansion into the UK regularly results in staff coming to the UK to manage the early development of the UK subsidiary. Nationals from EU countries have not had to consider visa issues. This may change in the future. The group parent should not assume that its employees can come to the UK without visas. For example an Irish parent company may second staff to the UK to manage the early stage of the UK subsidiary without considering that the staff are, say, Australians working in Dublin. Visa requirements for any secondments need to be explored.

Sending staff to the UK

The UK has tax breaks for movements of staff which may be of benefit. The extent to which the transfer is a temporary matter of a few months or a long term matter should be identified at the outset. This is to ensure that social security is paid to the right country and any relevant terms of bi-lateral social security agreements are applied. Even a short term transfer may result in PAYE obligations or reporting requirements which need to be managed.

Longer term staff transfers inevitably result in the individuals falling into the UK income tax net. Planning for salary equalisation is important when offering the individual a long term transfer. Also whilst developing their total remuneration package it is important that the impact of share options granted to secondees is understood in the UK and home state.

For both secondees and UK employees the HR policies associated with UK employment need to be identified and where appropriate, group policies flexed to meet UK employment laws.

Plan for setting up in the UK

The decision to come to the UK is a relatively easy one for many overseas businesses faced with the uncertainty of Brexit. For our friends in the Republic of Ireland it is possibly an easier decision to make, especially given our close histories, legislative approach and common language. However that does not prevent the need for planning by any group considering coming to the UK at both the tax level and the employee level. We are finding that the most successful businesses are those which engage with us on these matters at an early stage.

The Outlook for London’s property sector

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Paul Paling of Michelmores, John Redwood of Charles Stanley with Cetin Suleyman, Goodman Jones

Uncertain times have an impact on investor confidence. With Brexit on the horizon, Goodman Jones, Michelmores, and Charles Stanley hosted a debate on what the UK commercial and domestic property market might look like over the next year.

A group of 75 owners and senior individuals within the property sector met in Michelmores’ London office to discuss whether UK commercial property is undervalued and what the future holds for the property market.

The audience responded to several interactive questions to take the pulse on the challenges and opportunities facing UK real estate.

Affordability

A third of the audience felt that affordability was the key factor likely to affect UK house prices over the next twelve months. This was followed closely by interest rates, then SDLT and tax changes, with foreign investment, at 10%, being the least likely to have an effect on prices.

Tenant Demand

An overwhelming 58% of the audience believed that tenant demand will be the main factor affecting UK commercial (non-retail) property prices over the next 12 months. Foreign investment came next with 22%, followed by 14% who felt that a change in taxation will have an impact, with only 8% of the audience viewing interest rates as a factor.

House Prices

When asked the question “Do you expect the gap in house prices between London and the South East and the rest of the country to increase over the next 5 years?”, almost 70% of the audience considered this to be either unlikely or very unlikely. A minority of 10% felt it was very likely, with 22% deeming it a possibility.

Residential best for investment

Residential was the sector that 42% of the participants felt was the best to invest in now, followed by industrial/other at 35%. Offices and retail came bottom of the poll, with 15% and 8% respectively of the audience thinking these sectors presented a valid opportunity.

John Redwood, Chief Global Strategist at Charles Stanley, then delivered a presentation which covered a global statistical overview; the general economic outlook and the main risks to the UK market. These included the impact of a US interest rate rise and whether the UK would have to follow; the tariff and trade war; the Middle Eastern crisis and Russian involvement in the balance of power; a new phase to Euro area banking and deficits troubles; a potential Chinese slowdown; and finally, the impact of President Trump on the global stage.

In relation to the UK commercial property market, Mr Redwood highlighted the trophy purchases of several iconic London landmarks. He saw these as demonstrating a trend towards falling in line with book valuations, as opposed to the situation two years ago when the Cheesegrater (122 Leadenhall) sold for 25% above book valuation. However, as the recent purchases of a combined total of over 3 million square feet of office space by Apple, Facebook, Google and Bloomberg demonstrates, the technology, media and telecoms sector is currently spearheading demand for London space.

Will this level of demand continue? Mr Redwood discussed the negative and positive influences that could affect the UK property market, and put forward three scenarios outlining: Best Case (Stronger Growth); Worst Case (New Crisis); and Base Case (Muddling Through). With a 65% probability for the Base Case the message for the audience was that, while uncertain times lie ahead, things could be considerably worse, and a patient and pragmatic approach may be the best way to weather the storm.

Paul Paling, Head of London Michelmores, commented; “The evening stimulated keen debate, and as John Redwood highlighted there are headwinds to be reckoned with, however the outlook is not doom and gloom. We believe that the UK property market will continue to be resilient and an attractive investment prospect.”

Cetin Suleyman, Managing Partner, Goodman Jones concluded, “It was fascinating to hear the views of the room which included property developers and construction business owners. John Redwood’s observation was that digital transformation will have a significantly greater impact on business success than a short-term economic impact of the Brexit deal. As ever, uncertainty brings opportunity for entrepreneurs and businesses willing to invest in evolving to line with future market expectations.”

Is your UK holding company Brexit proof?

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UK holding company with EU subsidiaries?

A very common scenario we see is a UK holding company with subsidiaries scattered across the EU. In this scenario, profits may be paid up by the subsidiaries to the holding company by way of dividend, usually free of withholding tax under EU directives. A similar situation currently exists for certain interest and royalty payments.

The threat of withholding tax after Brexit

However, in under a year, the UK will have left the EU. Exactly what arrangements will be in place after we have left are still unknown. But, once we have left, it may well be the case that dividends paid up from EU subsidiaries to a UK holding company may well be subject to withholding tax, (depending on terms of any Double Tax Treaty between the countries concerned). Likewise, maybe, with interest payments, royalty payments, rents and certain other payments.

Review Double Tax Treaties with the countries where you have subsidiaries

Given the high rates of withholding taxes, UK holding companies should review Double Tax Treaties with those countries where subsidiaries are located to consider the potential cost impact of Withholding Taxes being levied. It may be appropriate to consider restructuring operations.

Initial thoughts on Taxation after Brexit

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Although the Brexit process is anticipated to take at least two years it is worth considering the possible tax consequences of leaving the EU.

Indirect Tax

The UK is part of the EU Customs Union and therefore goods can be moved to and from other member states without duties (either customs duties or import VAT). There are reduced compliance obligations on intra-EU transfers.

Unless the UK negotiates otherwise then goods brought into the UK from the EU will be subject to import VAT and import duty. Conversely goods exported out of the UK and into the EU will be subject to EU import VAT/duty.

The EU has negotiated favourable terms of export to third countries and the UK may lose the benefit of these rights. However the UK will no longer be bound to EU rates and tariffs and therefore may be able to reduce costs of importation or negotiate separate (even more favourable) terms of exports to third country.

The rate of VAT in the UK is controlled by Brussels. On leaving the EU these restrictions will be lost and therefore the standard rate of VAT may change and/or the items to which the zero rate applies extended.

At present there is a process allowing the UK to recover VAT incurred in other EU countries. This involves access to a single portal on the HMRC website. Although recovery will still be possible after Brexit the administrative process is likely to change and therefore there may be delays in future recovery of EU VAT.

Direct Tax

Direct taxes are broadly determined by member states without direction from Brussels and therefore there should be little impact on direct tax rates. Irrespective of this independence there are UK rules which have been specifically designed to be compatible with EU law and EU freedoms. Those rules can be repealed or varied.

Some tax reliefs are subject to EU state aid considerations and cannot be implemented without EU approval. Theoretically those reliefs could be expanded considerably. However the UK will remain a member of the OECD and therefore subject to OECD harmful tax practice considerations. These considerations are likely to restrict the introduction of very generous tax reliefs.

Withholding Taxes

There are exemptions from domestic withholding taxes for payments to EU members. After Brexit those exemptions would not necessarily continue and the rate of withholding tax would be determined by the tax treaty between the UK and its European neighbours. In the absence of any other agreements this would suggest an increase in withholding taxes on both inbound and outbound payments. Arrangements with gross up clauses (i.e. the recipient receives a certain sum and any withholding tax is a cost to the payer) would need to be managed carefully.

The UK does not have any outbound dividend withholding tax and therefore dividend payments out of the UK would remain unaffected.

Social Security

There are specific rules which apply to EU residents who work in another member state. They are designed to restrict the social security contribution to one state and determine which state that is. These rules may not apply after Brexit and this could lead to double taxation for some internationally mobile workers.

Timings for change

Any changes are not likely to be immediate. I would anticipate that Budget 2018 would prepare the country for any changes in our domestic taxation.

The reality is that no-one really knows the taxation impact of Brexit and the extent that some, or all, of the above occur can only be determined with the fullness of time.