The UK Government has published a series of technical notices which set out the potential implications for businesses and individuals of the UK leaving the EU without an agreement on 29th March 2019.
It is unlikely that leaving the EU will have a drastic impact on the domestic VAT regime and it will continue to have a VAT system after it leaves the EU. However, there will be implications for cross border trade of goods and services with the EU. This will apply with or without a deal.
Changes will include the introductions of ‘postpones’ accounting for import VAT through the VAT return; removal of low value consignment relief for parcels arriving in the UK sent by overseas businesses; and application of import VAT to vehicles brought into the UK from EU member states.
Businesses will be able to zero-rate sales of goods to EU consumers following disapplication of the distance selling rules; zero-rating will depend on UK businesses retaining evidence to prove that goods exported to EU businesses have left the UK, once requirement to complete EC sales lists is removed; and current rest of world rules will apply to the temporary storage of goods exported to an EU member state.
Input VAT deduction rules for financial services supplied to the EU are expected to change; access to the EU tour operators margin scheme will ceases; and UK businesses will no longer be able to use the UK’s VAT mini one-stop-shop (MOSS) for supplies of digital services to non-business customers.
EU IT systems
Businesses selling digital serviced to consumers in other EU member states will need to register for the VAT MOSS non-union scheme access to the EU VAT refund system will cease; and access to the EU VAT number validation service will continue, albeit without UK VAT registrations numbers being part of this service.
The EU state aid rules are designed to prevent member states introducing measures which may otherwise distort competition within the single market. Broadly, a measure constitutes state aid if it is an advantage granted by a member state on a selective basis to any organisation that could distort competition and trade in the EU. State aid rules can apply to direct grants or loans, but also to tax breaks provided selectively to certain sectors. In principle, state aid is not allowed in the EU. However, where a member state believes that a form of state aid would deliver growth or other important objectives, they can request approval from the EU. UK tax regimes currently subject to EU state aid approval include the Enterprise Management Incentive scheme, the Enterprise Investment Scheme and the SME R&D tax relief regime.
There has been speculation that if the state rules were to cease to apply to the UK after Brexit, this would allow the Government more leeway with regard to tax reliefs and incentives. However, this appears unlikely as the Governments technical notice indicates that, even in the event on a no deal scenario, they will seek to mirror the state aid rules in domestic legislation.
The Competition and Markets Authority, a world leading competition authority, will take on the role of enforcement and supervision for the whole of the UK. The UK government will continue to work with the devolved administrations to ensure the new state aid regime works for the whole of the UK.
Although not directly mentioned in the technical notes, another area where a no deal Brexit could have an impact is the withholding tax applicable to interest, royalties and dividends paid between the UK and the EU states.
At the moment, many groups with EU operations may rely on the Parent/Subsidiary Directive or Interest and Royalties Directive to remove the requirement to withhold tax on payments to and from the UK. However, as these directives are EU legislation, it is understood that they will no longer apply in the event of a no deal scenario.
In the absence of these directives, groups with interest, royalty or dividend flows between the UK and the EU will have to rely on the provisions of the relevant individual tax treaties for relief. The UK has tax treaties in place with each of the 27 EU countries. However, not all of these provide for a complete relief from withholding tax.
Post-Brexit negotiations may include discussion of new tax treaties to reduce these rates. However, it appears that withholding tax may start to apply to come cross border payments within groups.
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