How to prepare your business for the tax implications of Brexit

12 November 2020
On 1 January 2020, the EU and UK began a 12-month Brexit transition period. The interval was designed to give both sides time to negotiate and conclude a free trade agreement.

After 10 months, however, the UK and EU remain in dispute over some of the details of the EU-UK Withdrawal Agreement, which aimed to make the “divorce” amicable. Both sides continue to negotiate, and while a trade agreement is still possible before the end of the year, businesses should prepare for a worst-case “no deal” Brexit. This scenario will result in tariffs and quotas that will make UK-EU trade more expensive, cause delays at UK borders, and have other consequences.

As the clock ticks down on the transition period, organisations are running out of time to get ready for a no-deal Brexit. This article highlights some key steps businesses that sell goods and/or services should take to prepare. The list is in no particular order and not intended to be exhaustive, but gives businesses a solid starting point for lowering their risks and putting themselves in a position to thrive in the post-Brexit tax regulatory environment.

Value-added tax (VAT)
  • Postponed accounting. To avoid VAT cash flow issues, the UK is introducing postponed accounting so businesses are not saddled with a significant increase in import VAT for products purchased from the EU. In short, if you are VAT-registered and have a GB EORI number, rather than pay import VAT at the point of entry, you treat the import VAT as the amount of VAT due in Box 1 of the VAT return, and reclaim the exact same amount in Box 4.
  • Ecommerce goods VAT registration obligations. UK online sellers of goods to EU consumers will no longer be able to declare and pay VAT via their UK VAT return for countries where such sales are below the annual distance-selling threshold. (The threshold is currently 35,000 euros, except in the Netherlands, Luxembourg and Germany, which have a 100,000-euro threshold.) As a result, online sellers will need to register in each country where they sell goods and account for VAT accordingly. Some businesses are registering in another EU country where they will ship and/or store goods to continue benefiting from the distance-selling thresholds. The reverse situation will apply to EU online sellers moving goods to the UK.
  • VAT fiscal representation. Many EU countries require non-EU companies to appoint fiscal representatives as part of the VAT registration process. Starting in 2021, UK businesses will be non-EU companies. So if a UK business is now registered in the EU, it will require fiscal representation next year. Fiscal representatives are liable for any VAT not paid by their clients and typically demand some form of bank guarantee from the client.
  • B2C digital services VAT obligations. A provider of digital services to consumers can report sales made in all EU countries using a single filing known as the Mini One-Stop-Shop (MOSS) return. This is completed on HMRC’s online platform, and the VAT due is paid by HMRC to the appropriate EU country. In addition to UK businesses, non-EU businesses have used the UK MOSS return to report digital sales to the UK and the rest of the EU. The MOSS filing will not be available after 2020, so UK providers will have to complete a MOSS registration in another EU country. Non-EU businesses that used the UK MOSS regime will have to do the same. Starting in 2021, UK and non-EU businesses must report digital sales to UK consumers using UK VAT returns.
Cross-border transactions and tax
  • Withholding tax. Businesses should avoid withholding-tax exposure when possible. For example, you may be able to bring payments of intra-group dividends, royalties and interest forward to before the end of the year to benefit from European Directives. Consider domestic tax and treaty positions post-Brexit.
  • Transfer pricing. Businesses should update their transfer pricing policies as new operating models are set up and intra-group transactions are implemented.
Global mobility
  • Immigration compliance. UK businesses that deploy UK nationals to work in EU countries (and vice versa) will have to understand and comply with local obligations related to work permits and the EU’s Posting of Workers Directive.
  • Business travel. UK businesses will have to understand and follow EU requirements related to business travel, such as ETIAS visa waivers for business meetings and discussions and ensuring at least six months’ validity on passports.
  • Social security. UK- and EU-based businesses should review the social security positions of their mobile employees to ensure coverage is up to date and in accordance with local regulations.
Importing and exporting
  • EORI number (Economic Operator Registration and Identification). If your business imports goods into the UK from the EU, you will need a GB EORI number. If you export to the EU, you will need an EORI number in at least one EU member state. This applies whether or not you have a VAT registration number.
  • Supply chains. Your business should map your UK-EU import and export flows to understand who will be the importer of record and the owner of the goods when they’ve landed. You should also review your contracts to understand which party is responsible for customs duty and VAT charges. Finally, you should review your Incoterms (international commercial terms) to understand current VAT and customs obligations.
  • Customs agent or freight forwarder. Your business should appoint a customs agent or freight forwarder to ensure you clear goods and declare customs correctly. Consider customs procedure codes, tariff and commodity codes, and available simplifications and reliefs.
  • Northern Ireland. This part of the UK will have special status, effectively remaining part of the EU for the purposes of selling and moving goods. As a result, the sale of goods between Northern Ireland and other EU member states will be treated under existing EU rules, while supplies between Northern Ireland and the rest of the UK will be treated as imports and exports.

Bryn Walters, Director, International Tax Advisory, contributed to this article.