Brexit: Tax and other challenges facing business

A change as seismic as Brexit couldn’t possibly happen without causing some disruption, and the late finalisation of the Brexit trade deal certainly didn’t help. One word sums up what is troubling businesses right now: uncertainty, caused by a new cross-border taxation environment, changes to tax law, and increased bureaucracy. Other potential impacts of Brexit, such as the effect on UK businesses of new immigration requirements, remain unclear as well.

Businesses are unsure both about what has already happened and what is yet to happen. I sought the views of colleagues to get their take on the challenges ahead.

Taxation changes: Good news or bad?

Changes to taxation are unavoidable, as the UK has lost the benefits conferred by the EU parent-subsidiary and interest-and-royalties directives. These directives allowed businesses to avoid withholding taxes on payments between associated companies in EU member states. This no longer applies to UK businesses, who must now expect withholding taxes on payments of interest, royalties, and dividends between UK and EU subsidiaries. Businesses should review carefully relevant double-taxation treaties and re-examine cross-border payments between group companies.

While presented as a tariff-free trade deal, the Brexit agreement did not shield businesses from all tariffs, nor did it prevent the inevitable changes to VAT accounting on trade between the UK and the EU. In some cases, businesses in the EU must now register and account for UK VAT, and the reverse also applies. Jaspal Dhillon, VAT director at Lubbock Fine explained: “The detail in the deal refers to rules of origin, which means that trading is only tariff-free if goods originate in either the UK or EU. If goods originate elsewhere, or there is no evidence of origin, businesses will be subject to customs duty.”

There is the added complication of Northern Ireland. To avoid a UK-EU land border between Northern Ireland and the Republic of Ireland, a virtual border exists between Great Britain and Northern Ireland. Dhillon said: “Trading in goods in Northern Ireland between the EU and Great Britain brings additional and complex rules to consider. EU VAT rules concerning the supply and movement of goods will still apply in Northern Ireland, despite its remaining part of the UK’s VAT system.”

To avoid any nasty surprises, Dhillon suggests businesses examine their supply chains: “We are advising our clients to map their supply chains, identify where their suppliers and customers are located, and, if necessary, consider simplifying their existing arrangements. VAT works in real time, so businesses need to consider any VAT liability at the time of supply. Businesses should seek advice to ensure they comply in the UK and the EU.”

Moving away from EU tax law

Of course, Brexit means the UK is no longer under the jurisdiction of the European courts. But is this a good thing for UK businesses? There are positives and negatives. There is some concern that the UK may take the opportunity to remove certain concessions that applied because of EU tax law, such as those relating to cross-border loss relief. On the plus side, the UK may use Brexit as an opportunity to make the domestic tax regime more attractive to foreign investors, as the Brexit agreement seems to leave this option open. If or when the UK might take such steps remains unclear.

However, there is one change we can be sure about: changes to the EU’s DAC 6 requirements. The UK has significantly reduced the scope of DAC 6, the new mandatory reporting requirement for cross-border arrangements when there are indicators of aggressive tax planning. Only arrangements designed to sidestep the Common Reporting Standard or to hide beneficial ownership will remain subject to the DAC 6 requirements, otherwise the OECD’s mandatory disclosure rules will apply. This is a relaxation many will welcome.

As for VAT, Dhillon sees a time when the UK makes its own VAT laws, which will create its own disruption: “Once the international supply issues have settled, the UK will be able to make VAT law as it pleases, without restriction from EU directives, regulations, or courts. Inevitably, there will be changes, renewed interpretation by HMRC and UK taxpayers, and plenty of litigation in relation to UK VAT law.”

Border controls: New paperwork requirements

In the run-up to Brexit there was already growing concern about the additional bureaucracy that new border controls would bring, with businesses having to adapt to sudden export and import requirements that hadn’t existed for decades. Mark Turner, managing partner at Lubbock Fine, has witnessed clients’ frustrations with these new burdens: “For many UK businesses, including our clients, the most immediate post-Brexit impact has been the increase in red tape. Those that import from, and export to, Europe have had to rapidly study, understand, and allocate time for complicated new paperwork requirements on both sides. This has inevitably caused early disruption in the supply chain, exacerbated by COVID-19 restrictions and border closures.”

But border controls don’t just affect imports and exports; only time will tell what the impact on people, both employees and investors, will be. For immigration and inbound investment, the main concern is that the potential requirement for visas, and any related restriction on employee mobility, might adversely affect UK businesses.

While the lateness of the Brexit trade deal left little time for businesses to prepare, Turner is optimistic that things will improve soon: “Now that the final regulations have been published and supply chains begin to restabilise, we hope to see UK businesses adapting quickly to the new normal.”

Brexit: The view from Europe

The impact of Brexit isn’t only felt in the UK, it affects those in the EU, too. Professor Klaus-Peter Hillebrand, Ph.D., the CEO of DOMUS AG, said: “I am relieved the Brexit trade deal finally happened. The chaos that a disorderly Brexit would have brought has been averted. However, the new cooperation between Brussels and London will not be easy. On the contrary.”

Hillebrand agrees that a trade deal is far preferable to no trade deal: “The UK is the EU’s second-largest export market after the USA, and no market is more important to the UK than the EU. Free trade with no tariffs or quantitative restrictions on the movement of goods will prevent many problems.”

Hillebrand does envisage some difficulties, though. “Brexit inevitably brings more bureaucracy. Tighter controls on the movement of goods will create problems even for well-established supply chains,” he said. “The new economic cooperation rules will cost time and money in both the EU and the UK. These are turbulent times. Brexit brings significant changes to taxation and corporate law that, for some clients, may present existential risks. It is the job of tax advisers to help guide their clients through the Brexit jungle.”

— Phil Moss is a tax partner at Lubbock Fine, a London-based firm of chartered accountants that is a member of Russell Bedford International, a global network of independent professional firms. To comment on this article or to suggest an idea for another article, contact Dave Strausfeld, an FM magazine senior editor, at David.Strausfeld@aicpa-cima.com.