David Brookes, tax partner at BDO, looks at the tax implications that leaving the EU has on UK businesses.
SO, the results are in. Like it or loathe it, it is that crucial management teams consider the short and long-term implications Brexit will have on their business.
Although the vote for Brexit may have little immediate impact beyond increased volatility in the currency markets and stock markets, if there is an Emergency Budget designed to calm markets this may bring substantive tax changes fairly quickly.
In the longer term, the effects on business could be more fundamental and are unlikely to make it easier to do business within the EU. How much more difficult EU trade becomes will clearly depend on the terms the UK can agree for Brexit but this may not become clear for many years.
In the meantime, uncertainty over the UK’s relationship with the EU will continue for months or years, creating a drag on the economy as businesses and consumers take a wait and see approach to investments and major purchases.
As with all major economic shocks, businesses that remain engaged and adaptable will be best placed to trade profitably through the changes and make the most of the opportunities that they offer. Here we look at five of the key tax implications for UK businesses.
- Customs duty impact
On formal exit, the UK will no longer be part of EU’s Customs Union. As a result, EU’s customs duties could apply to imports from the UK, making it less attractive for EU companies and consumers to source goods from UK companies.
Similarly, the UK government may extend the current UK customs duty tariff to imports from the EU, adding costs for UK companies reliant on raw material and finished goods from EU suppliers.
Practical barriers would also arise as all goods would need to be customs cleared (first exported, then imported, in both directions), adding time, complexity and cost to value chains.
Businesses should consider:
- Are sales within the EU large enough to justify moving manufacturing and operations to an EU site to avoid a customs duty hit on margins?
- For imports, how would total costs (including duties) compare from EU suppliers v potential non-EU suppliers?
- For current EU imports, can suppliers be changed easily? If not, do prices of goods need to be increased?
- For importing materials or unfinished goods in from outside the EU, is there a need for parallel inbound warehouses (one EU based and one UK based)?
- VAT issues
After a Brexit, sales of goods to and from the UK may no longer be able to use the EU’s acquisition and dispatch system (accounted for on VAT returns). Instead they would become imports and exports which would need to clear customs and incur import charges – triggering a cash flow disadvantage (the delay between paying customs charges and entitlement to recover the input VAT). This can be mitigated by using deferment and customs warehousing arrangements.
UK businesses that are required to register for VAT in some EU member states – for reasons such as they hold stock there – will have to appoint a fiscal representative locally to deal with their returns.
Businesses should ask themselves:
- How much more working capital will be needed to finance the VAT cashflow cost?
- How can costs for VAT registrations and administration be managed across the EU?
- Repatriating profits to the UK
Withholding taxes on dividends from EU subsidiaries or payments of interest or royalties to or from companies located in the EU may become a cash flow problem.
Currently, the parent subsidiary directive allows subsidiary companies to pay dividends up to UK parent company without the need to account for withholding tax. Similarly, companies often rely on the interest and royalties directive to make interest or royalty payments free from either UK or local withholding taxes.
If the benefit of these Directives is withdrawn, companies would be relying on existing bilateral double taxation agreements in order to reduce or eliminate withholding tax rates.
Although the UK has double tax treaties with all of the other EU 27 member states, more than half of these allow the tax authorities in the payer company jurisdiction to levy withholding tax. Although often at relatively low rates, it is another tax issue to be managed.
Businesses should consider:
- Would it be better overall to have foreign branches than foreign subsidiaries in the future?
- Will the current group structure trigger withholding tax under just the UKs DTAs?
- Will potential withholding taxes have a large enough impact to justify a group restructure?
- Will group financing arrangements within the EU need to change (eg to minimize WHT re interest payments)?
- Expanding in Europe
Groups can currently take advantage of EU provisions in order to undertake reorganisations or mergers of their European operations on a tax neutral basis. While these rules are incorporated into UK tax law and may continue to apply to reorganisations undertaken by UK companies, is likely that in the local rules in the remaining 27 EU member states would no longer extend to include the UK.
Bearing this in mind, if businesses are considering acquiring an EU business, it could be prudent to move more quickly before Brexit negotiations are completed.
- An exit opportunity
Customs duties work both ways; it is likely that the UK will impose duties on EU imports if a comprehensive free trade arrangement with the EU cannot be maintained. Therefore, European businesses may be looking to acquire UK businesses to protect or expand their UK trade.
For business owners, considering an exit in the next few years, can this be brought forward with a sale to an EU-based competitor before the Brexit negotiations are finalised.