Potential Tax Impact of Brexit
June 30, 2016
Last week, U.K. citizens voted to leave the European Union (EU), an action referred to in the press as “Brexit.” Brexit may have a major impact on businesses globally, particularly in the area of value-added tax (VAT) and customs, which are based on EU legislation. Once Brexit is complete, customs regulations and VAT directives no longer will apply to trade with the U.K. The consequences may be positive and negative. Following is a high-level summary of rules that could change because of Brexit.
Goods From EU to UK and Vice Versa
Under EU customs law, duties are levied only when goods are imported from outside the EU, and no further duties are due when transporting these goods to other member states. Specific EU VAT rules generally remove the need for companies to register in each country in the EU in which they conduct business. Following Brexit, goods sold by the U.K. to EU member states and vice versa will be treated as exports and imports to and from a third country. This could result in increased compliance costs such as registration for VAT purposes, requirement of transit and export documents, or even import declarations in the U.K. or the EU. Furthermore, the U.K. may adopt import rates different from those in the EU or levy import duties on goods shipped from the EU, and vice versa.
Services From EU to UK
Under EU law, cross-border business-to-business sales within the EU are taxed in the country of destination, and the VAT liability in relation to this transaction lies with the buyer. Brexit may trigger an obligation for EU businesses to register for VAT in the U.K. when supplying services to U.K. businesses.
Under EU law, VAT incurred on costs related to the provision of VAT-exempt services cannot be recovered. Providing loans or managing an investment fund are examples of services that are exempt from VAT. To protect the position of EU financial institutions participating in global trade, however, VAT can be recovered for services provided to recipients outside the EU. Therefore, after Brexit, input-VAT related to financial services provided to U.K. customers by EU financial institutions should be recoverable. This may have a huge impact on companies providing exempt activities (banks, insurance companies, investment managers).
The EU provides for a mini one-stop-shop (MOSS) system for electronic and telecommunication services to consumers. MOSS allows businesses to sell digital services to consumers in more than one EU country and to declare and pay all their VAT in their own member state. This system prevents registrations in all EU countries where the customers reside. As a result of Brexit, the MOSS portal no longer will be available to EU companies when doing business with the U.K. or when selling to U.K. consumers.
The U.K. may exercise one of the following options to limit the negative financial impact of Brexit:
- Choose to rejoin the European Economic Area (EEA), and benefit from the EEA’s arrangement with the EU.
- Close a bilateral agreement with the EU (perhaps for a transitional period) to mitigate or reduce negative trade effects related to its secession from the EU.
It remains to be seen the extent to which the U.K. will maintain consistency with legislative European developments and EU case law.
Because of the vote for Brexit, VAT and customs regulations likely will change when trading with the U.K. The EU and the U.K. may come to an agreement to smooth the transition to the post-Brexit period, but it will take time to finalize the plan. Until more information is available, businesses with U.K. activity should continue monitoring the situation to identify areas of opportunity.