Brexit – what next?

Thu 04 Apr 2019

I started engaging with my clients in the UK and mainland Europe immediately after the EU referendum in June 2016, to try to help them understand the potential tax and commercial impacts of Brexit and to work out a considered action plan.

In the early days of post-referendum confusion, it was relatively easy to assess the expected indirect and direct tax consequences of the most likely possible options (a customs union like Turkey, an EEA model like Norway, a free trade agreement model like either Switzerland or Canada or life under World Trade Organisation rules). In the intervening period of almost 3 years, these options gradually narrowed as parties on all sides made various announcements about what they would and could not support and I dutifully crossed them off my slides, until we ended up with the binary options of Theresa May’s Withdrawal Agreement or a “no deal” exit.

Today, with no clear consensus in parliament, it now seems as though we are back to square one and the original full range of options may be back on the table. It’s all very confusing!  Even HMRC has withdrawn its helpful partnership pack entitled “Preparing for changes at the UK border after a no deal EU exit” because it’s out of date. So what can you do now to prepare your business for Brexit?

Quick summary of where we are today

It’s difficult to comment on where the UK now stands politically and whether there may be another general election, proper cross party working groups emerging etc., but legally, the position is as follows:

• The legal date of Brexit, enacted by Parliament, is 12 April 2019.
• The UK has until this date to do one of the following:
  1. Vote through the existing Withdrawal Agreement signed by the UK and the EU, with a leave date of 22 May 2019.  This has already failed 3 times, most recently without the attached Political Declaration.
  2. Negotiate another extension to the deadline for agreeing the existing Withdrawal Agreement.
  3. Bring a new proposal to the EU table for discussion and agree a new extension to the deadline.
  4. Revoke Article 50 and cancel Brexit as it currently stands.
• If none of these happen, the UK will leave the EU without a deal on 12 April, whether or not Parliament agree to leaving without a deal, which they have voted against several times.

Consequences of a “no deal”

The consequences of a “no deal” Brexit will have the most impact of all the options.  The Government has recently made a number of announcements and produced a number of technical papers to give some certainty in these areas in the event of a no-deal Brexit, including on the following points: 

• Postponed accounting for VAT will apply to all imports of goods from EU and non-EU countries.  This means that VAT will not have to be paid at the point of import into the UK from any country, which would have led to cash flow issues for many businesses.  Administration procedures are likely to be different, however.
• Some specific VAT arrangements, such as Low value consignment relief and Distance selling arrangements, will end (and low value parcel consignments will be outside postponed VAT accounting).  The UK will stop being part of the EU wide VAT IT systems such as the mini-one-stop shop.
• Customs duty tariffs and procedures will apply for imports and exports between the UK and EU countries, as they do now with countries outside of the EU.  Businesses that start importing and exporting for the first time should apply for an Economic Operator Registration and Identification (“EORI”) number now.  There are complexities to this application process where a company already has one EORI number (say a UK-EORI), but will also need an EU EORI number after a no deal Brexit.
• Correct commodity classification codes will need to be identified and the correct import tariff applied.  This is a complex area and assistance may be required, as penalties may arise if the wrong codes and tariffs are used.  HMRC’s “Classifying your goods in the UK Trade Tariff if there’s no Brexit deal” guidance has also just been withdrawn.  It is possible to register for simplified procedures which may ameliorate compliance deadlines in this area.
• As a temporary measure, the Government has announced that 87% of imports will be subject to zero tariffs for up to 12 months pending agreement on a more permanent system.
• On the direct tax side, some existing group structures could lead to withholding tax leakage on payments made between the UK and a number of EU countries in respect of dividends, interest and royalties (including some payments between EU subs with a common UK parent).. This is because, post Brexit, the EU Directives will not apply and not all our double tax treaties reduce withholding tax rates to zero.
• However, the Government has recently confirmed that, subject to meeting application requirements and/or certain factual requirements, UK companies and UK permanent establishments will not have to deduct withholding tax on payments of interest and royalties to EU countries, regardless of the treaty rate  There is no withholding tax on payments of dividends out of the UK in any case.
• Some direct tax reliefs, such as relief for incorporating EU branches into subsidiaries, will no longer be available after Brexit.

What should I do next?

In addition to the tax consequences I have mentioned above, there are a myriad of commercial, legal, regulatory, workforce and contractual implications of Brexit that may impact your business.  Many of our clients have already fully or partially implemented their action plans in a wide variety of different way, such as increasing stocks of raw materials or finished goods, restructuring their entities, re-organising their supply chains, looking at their key employee profiles etc.

But with 10 days to go there is little time for the many businesses that have not yet carried out an analysis of the risks Brexit poses to their business or started any sort of action planning.  An oft cited reason for this is that there is just too much uncertainty and in some ways, this has never been more true.  However, being as prepared as possible for the worst case Brexit scenario may still give you a real advantage over your competitors, allow you to be better prepared in a commercial negotiation and enable you to carry on operating in the most efficient manner.

Please get in touch with Claire Cowen from the Mazars international tax team for a further discussion:
claire.cowen@mazars.co.uk  T: +44 (0)116 281 6525 | M: +44 (0)7920 783 188.