In conjunction with MHA MacIntyre Hudson and Baker Tilly Netherlands, Baker Tilly US recently hosted a comprehensive webinar focused on the unique challenges and opportunities that many companies are facing as a result of Brexit.
It is clear that Brexit is going to impact companies doing business in the EU and the U.K. in many ways – from their day-to-day business, to their handling of value-added tax (VAT) and customs, to their tax implications. Below we have highlighted some of these impacts, and we welcome you to reach out to Baker Tilly’s specialty tax leader, Lynette Stolarzyk, to learn more and discuss ways that Baker Tilly can assist your company.
For more information on this topic, or to learn how Baker Tilly specialists can help, contact our team.
What is the impact of Brexit from a U.K. VAT and customs perspective?
Brexit is officially happening. The U.K. has left the European Union and finds itself in a transitional period through the end of the year. In the situation that the U.K. is being considered a non-EU country, from a VAT and customs perspective from Jan. 1, 2021:
- All supplies of goods to the EU from the U.K. will become third-country exports and be subject to customs declarations. The same applies for movements of goods from the EU to the U.K.
- Customs duty will be charged on U.K. goods imported into the EU, based on the tariffs determined by the EU.
- Customs duty will be charged on EU goods imported into the U.K., based on the tariffs determined by the U.K.
As a result, we are down to a matter of weeks for the U.K. and the EU to agree on a trade deal in time for 2021. Businesses in the U.K., throughout the EU and across the world are eagerly awaiting the trade deal specifics (including tariff details) in order to plan for the new rules and they anticipate incoming challenges beginning on Jan. 1, 2021.
Some of the key customs and U.K. customs and VAT changes that we know are going to happen include:
- The introduction of the UK Global Tariff: The U.K. will no longer be bound by the current EU Common External Tariff.
- The postponement of import VAT accounting: VAT will not be paid on the importation of most goods.
- The deferment of import declarations: This initiative applies only to “standard” goods and requires submission of customs declaration within six months.
- The changes surrounding e-commerce: With the abolishment of the Low Value Bulking of Imports (LVBI) on Jan. 1, the overseas seller or online marketplace will be required to charge VAT at the point of sale for any transactions under £135.
- The introduction of the Trader Support Service: This is a new online portal for declaring goods going into Northern Ireland from Great Britain.
The key issues here include the importance of incoterms, which determine who will be the importer and thus responsible for duty and VAT. U.S.-based businesses may already be familiar with incoterms, but the complicated rules will be new to many U.K. and EU businesses.
Another key issue is the customs relief regimes, which are meant to help minimize duty costs and in particular to minimize the chance of getting hit with double-duty costs. Previously, companies could import goods from the U.S. into the U.K. and then onto other countries in the EU without paying duty twice, but now the importer may incur double-duty. Utilizing a customs warehouse – whether it is your own or through a third party – is one possible solution to avoiding double-duty.
Other key issues that you should be aware of include:
- Labeling and packaging legislation: The EU labeling legislation requires an EU address on the label of imported goods. Particularly for food and beverage companies, this is an important challenge moving forward.
- Conformitè Europëenne (CE) marks and U.K. Conformity Assessed (UKCA) marks: If you are importing goods from outside the U.K., instead of using the CE marking, you will likely need to switch to the UKCA marking, where it’s required, although there will be a one-year grace period where CE marks will be allowed.
- Administrative issues: You may need agents, fiscal representatives or someone to oversee your VAT registrations and/or your customs declarations.
How does Brexit impact U.S. businesses for VAT and customs?
VAT is a consumption tax which taxes every transaction in a supply chain. Suppliers charge VAT when selling a product or service and business customers reclaim the VAT charged. Only the consumer carries the VAT burden. For U.S. companies, VAT reporting obligations can be triggered by an establishment (such as a legal entity or nexus in a foreign country) but also by having “only” inventory in an EU country from which these goods are sold to and transported to customers, among other ways.
When it comes to VAT, there are many key considerations that a company must consider. Some of the important questions are:
- Are you supplying goods or are you providing services?
- In which EU country are these taxable for VAT?
- Who is responsible for the payment of VAT to the tax authorities?
- What VAT rate is applicable?
- Is the VAT charge refundable?
- Can simplified regulations be applied?
- Are any exceptions applicable?
- Are any additional conditions applicable?
U.S. businesses that import goods to the U.K. and then sell those goods throughout Europe will face a litany of new issues. Who is responsible for the export charge? Who is responsible for the customs clearance into the EU? This is relevant because when goods are imported into an EU country, import duties and import VAT are due right away. Import VAT deferment is another dynamic that impacts certain countries. If you hold stock in the U.K. while the EU is your main market, you and your customers will run into customs obligations for every transaction involved. With this in mind, perhaps it is worth exploring whether it makes sense to change the nation where you house your inventory in Europe.
U.S. businesses that provide services to the U.K. and the EU face a different set of VAT rules and requirements, and in some situations, changes must be made to the current set-up to make sure that companies comply and unnecessary costs are avoided. The factors include what type of service they provide, whether they are B2B or B2C, and whether they provide electronic services (online media, apps, etc.).
Of course, there are certain VAT simplification rules that will no longer be applicable in case of a no-deal Brexit. This list includes triangular transactions, call-off stock simplification rules, regulations surrounding the installation of goods, and distance selling rules.
So with all this as a background, what do you need to do?
- Analyze your supply chain and pricing: Check which terms are applicable to your supply chain and check if your pricing is accurate. We recommend that you model, model and then model the numbers some more. Please reach out to us if you have any questions.
- Check your customs and logistics partners: Are you ready for the upcoming changes? What are the additional charges for the export and import declarations?
- Check your contracts: Are the contracts closed with all parties relevant to your supply chain up to date? Not only with your customers but also with your suppliers.
- Arrange all formalities: Make sure you can continue business with little or no interruption on Jan. 1, 2021. If required, get an Economic Operators Registration and Identification (EORI) number in the U.K., in an EU country, arrange the necessary VAT registrations, etc.
From a structure and direct tax perspective, a no-deal Brexit would present the following changes:
- Parent subsidiary directive and royalties and interest directive would no longer apply
– These directives allow companies and subsidiaries in the EU to pay dividends to parent companies within the EU with no withholding tax. The U.K. has tax treaties with virtually all EU countries, meaning there likely will not be a significant change if these directives are eliminated. (Depending, of course, on which EU states you are operating in.) - Directive on Administrative Cooperation (DAC) would no longer apply
– DAC gives rise to DAC 6, which is designed to stop questionable tax-avoiding transactions between states but often captures transactions with good intentions. This is a reporting obligation with stringent penalties for failures, so it needs care. - Anti-Tax Avoidance Directive would cover various tax-avoiding schemes
- U.S. Limitation on Benefits provisions may apply
– This isn’t considered an issue at the moment, but a move-out of the EU could trigger additional complications.
So, what needs to change at your organization as it pertains to Brexit? On the direct tax side, there likely is not much you need to worry about it. Of course, though, it depends on your business and structure, on whether you provide goods or services, on whether you import, export or both, and whether you truly need an EU presence, among other factors.
Each company needs to decide if it wants to have a subsidiary based in the EU, but generally, companies will not need one. As far as whether they should create a holding company in the U.K., some of the factors to consider, from a fiscal standpoint, include the U.K.’s:
- Extensive tax treaty network
- Foreign dividend exemption
- Substantial shareholdings exemption
- Lack of withholding tax on dividends paid
- Favorable incentives for R&D, Patent Box
- Low CT rate in G7/20
- Flexible loss rules
From a non-fiscal standpoint, the U.K. offers U.S.-based companies a similar language and a similar culture, as well as the U.K.’s:
- Economic and political stability
- Respected legal system
- Flexible labor market
- Strong and credible capital markets
- Relatively young population
So while Brexit will change the relationship between the U.K. and the EU, it may not change the way you do business or require you to make any structural changes. You should review your business to determine whether you are impacted and to what degree. Of particular importance is analyzing your supply chain and conducting a variety of models to determine which direction makes the most sense for your company. Of course, the sooner you begin this process, the better. Whatever you need and whatever you ultimately decide, Baker Tilly and our team of international specialists – as well as our extensive Baker Tilly International network – are always here to help.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.
