Ongoing ambiguity surrounding Brexit is affecting many kinds of businesses in different ways.
The international tax implications of the UK’s looming withdrawal from the European Union are among the issues that need to be considered.
If your business carries out work in the EU, there will be tax consequences of Brexit.
Currently, where profits are distributed, for example by way of a dividend by a subsidiary company in one EU country to a parent company in another member state, no withholding tax (WHT) is applied, provided certain criteria are met.
This is called the Parent-Subsidiary Directive.
As well as this, there is also the EU Interest and Royalties Directive, where any interest or royalties can be paid between two member states without the requirement to withhold tax.
If there is a no-deal Brexit and the UK is no longer a member of the EU, the benefits of these directives may be withdrawn, which could result in WHT being applied to these transactions. If this is the case, companies will have to check the domestic tax legislation of the relevant EU country to determine if WHT is applicable.
And if, under the domestic tax legislation, there is WHT to be applied, the next step would be to check if there is a Double Tax Treaty (DTT) between the relevant countries.
The DTT may result in a lower rate of tax.
But if transactions are taxed under the domestic tax legislation and the DTT does not reduce this to nil, the business could be exposed to a new additional tax cost which may prove challenging to mitigate.
For example, a payment from Italy to the UK post-Brexit may no longer benefit from the EU directives and could, therefore, be taxed at a higher rate under the DTT or domestic legislation.
This could result in higher overall tax costs for businesses – and tax leakage if not properly planned.
Social security is another challenge that companies may face when their employees are working in the EU.
The current position for a UK national working elsewhere in the EU is that they are liable only for national insurance contributions (NICs) in the UK if they have secured an A1 exemption certificate – available from HM Revenue and Customs – which, if certain conditions are met, removes any requirement for them to pay NICs in the foreign country where they are working.
Post-Brexit, there is a risk this exemption will no longer be recognised which could result in an additional social security burden on companies and their employees.
As well as considering the implications for direct taxes, thought should also be given to the indirect tax implications of a no-deal Brexit.
Any movement of goods between the UK and EU will require import and export customs declarations.
For imports into the UK, these will be set on a non-preferential basis using the “most favoured nation” tariff schedule of the World Trade Organisation.
A no-deal Brexit would bring limited changes to the VAT treatment of cross-border transactions.
However, UK businesses would lose the benefit of some of the EU VAT simplifications, resulting in a requirement to register for VAT in an EU member state.
To avoid the cash flow cost of import VAT, this would be reported on VAT returns rather than being paid at the port. This will apply to imports from EU and non-EU jurisdictions.
Businesses are understandably confused by the lack of information about Brexit and so it is essential for them to watch closely the details of the negotiations for Britain’s exit from the EU. It is also worth engaging professional advisers, with particular expertise in helping you understand your taxation exposure to working overseas, regardless of the size or the stage your business is at.