The Prime Minister started the Brexit process on 29th March, invoking Article 50 of the Lisbon Treaty, presenting a letter to Brussels and the Parliament which will outline Britain’s strategy on the future negotiations with the remaining members of the EU. Britain will need to address the thorny issues of a possible large bill for the European budget and pension obligations as well as discussing trade, security, fishing, aviation, environment, health and most importantly the citizenship rights of the three million or so EU migrant in the UK and the one million British working in Europe. It is also possible that Britain could exit without any trade deal after two years.
The UK is an attractive location for business because it has competitive tax rates and reliefs compared to the rest of Europe and the UK has extensive unilateral, bilateral tax reliefs as well as benefitting from the EU Directives. The UK does not withhold any tax on payments on dividends, and it has generous participation exemption legislation on inbound income from foreign subsidiaries in the form of dividends, interests, capital gains. As a general rule, in the absence of a double tax treaty, the UK withholds 20% on payments of interest although there are specific exemptions where payments are made to other UK companies, interest payments on Eurobonds and on short term loans. The UK double tax treaty mostly applies a zero percent withholding tax (WHT) on payments to residents of most European countries. The same is also true for payments of royalties. Dividends received from small and large subsidiaries within the European territory are exempt from UK corporation tax under domestic legislation.
The UK does not unfairly tax undistributed profits of UK controlled foreign companies (CFC), therefore, the UK has a targeted CFC regime which does not unfairly seek to collect tax from entities residents even in low tax jurisdictions as long as there is genuine substance i.e. local business and trading activities.
The UK also has generous rules for deduction of interest loans which may be subject to thin capitalization. Apart from this, there are commercial reasons why the UK is a good choice for business. These tax advantages are likely to stay and perhaps even improve as the UK will wish to remain competitive on in and outbound investments. Even though the UK may not be protected by the EU Council directives over remittance of the foreign income because of UK’s extensive networks of treaties, most inbound income will not suffer WHT anyway. So, the argument is rather redundant and any WHT is likely to be only from a few countries and mainly affects cash flows as UK offers foreign tax credit reliefs.
After Brexit in two years’ time, UK will have more flexibility over rates, reduction and thresholds of VAT. The UK currently has a VAT rate of 20% which is competitive with other EU countries and has the highest threshold. Currently, the UK is restrained on what it can or cannot do on the rates of VAT and duties charged on imports. The UK offers VAT relief schemes for small businesses which are supervised by the EU but following Brexit UK will be able to change these as it wishes.
Once UK leaves EU, then goods in and out of the EU will be treated as imports and exports rather than ‘acquisitions` and normal VAT rules will apply. Duty rates from EU member countries will be subject to negotiations with each member states. The valuation rules for duties are set by WTO and are outside the EU. Presently there are no duties on the supply of goods within the EU. So, this will be a major area for the UK to negotiate and to protect its economy. Whist UK is the member of the EU, there is free movement of goods and services, and when it leaves then, in theory, there will be a custom border between it and the rest of the EU. So, VAT and duties will be payable on imports and exports with added administration costs. The eventual outcome will depend on what trade deal the British Government will strike with the EU. It could still stay in the customs union or separately negotiate bi-lateral trade agreement with other member countries. Alternatively, the UK may accept the free movement of people and adopt the Swiss model which requires some degrees of contribution and buys free movement of goods and services. If there is no trade agreement, then WTO rules will apply to duty rates.
Goods that are transported across member states which involve an intermediary supplier are subject to the triangulation VAT rules, and EU offers simplification in accounting for VAT so that the intermediary supplier does not need to register in the other member state where goods are finally dispatched. This simplification is not afforded to supplies which are brought in from outside the EU and therefore also the UK when it leaves the union.
Concerning the supply of services to taxable persons, the general rule is that the place of supply of is where the customer belongs. If the customer is outside the EU, the supplies are therefore outside of the scope of the VAT. There are special rules for intra EC supplies. A supply to an EU member is zero-rated but the customer has to account for the VAT using the ‘reverse charge’ mechanism similar to the ‘acquisition’ of goods, the customer will charge himself local VAT as output tax and then recovers self-charged VAT as input tax under the local VAT recovery rules of the member country. The rules on the place of supply of services are not straight forward as there are special rules which are an exception to the norm such as services connected to land, intellectual services, electronic services and intermediary services to name a few. Currently, where EU member supplies telecommunication broadcasting and e-services to consumers in other member states, then the services are taxed where the consumer is located. To remove the need for UK to register in each member state, a Mini One Stop Shop (MOSS) was introduced back in January 2015. Once the UK leaves the EU, it will not be able to take advantage of MOSS.
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Article written by Haroon Rafique (Principal, Meer & Co Chartered Accountants and Tax Consultants)
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