How Brexit Impacted UK-EU Tax and Legal Relations: VAT, Customs, and Directives

  • QUESTION POSTED BY: Student
  • PROGRAMME: Postgraduate Diploma in International Taxation
  • TOPIC: Introduction to International Taxation (WEEKS 1 & 2)
  • LECTURER: Dr Daniel N Erasmus

FULL QUESTION

How did Brexit impact the legal and tax implications between the UK and the European Union?

ADDITIONAL WRITTEN ANSWER

Brexit has significantly altered the legal and tax landscape between the UK and the European Union, particularly in the realm of international tax. Here’s a detailed breakdown of the key impacts:

1. VAT and Customs:

VAT and Customs are among the most directly affected areas by Brexit since both are essentially EU taxes. Prior to Brexit, the UK was part of the EU’s VAT system and Customs Union, which simplified trade within the EU by treating cross-border transactions similarly to domestic ones.

  • Post-Brexit VAT: After Brexit, UK businesses are no longer part of the EU VAT system. This means that cross-border transactions between the UK and EU are treated as imports and exports, resulting in additional VAT and customs procedures. For UK businesses selling goods to the EU, this adds administrative burdens, such as obtaining an Economic Operators Registration and Identification (EORI) number, completing customs declarations, and dealing with potentially different VAT rules across individual EU countries.
  • Post-Brexit Customs: The UK is now outside the EU Customs Union, which means that customs duties may be imposed on goods traded between the UK and EU, depending on the terms of any trade agreements. For businesses, this entails increased costs, potential delays, and more complex procedures.

2. EU Parent Subsidiary Directive:

The EU Parent Subsidiary Directive eliminated withholding taxes on dividends paid between qualifying EU member states’ parent companies and subsidiaries. However, as the UK is no longer part of the EU, this directive no longer applies to UK companies.

  • Impact on Dividends: Without the Parent Subsidiary Directive, UK companies may face withholding taxes on dividends paid from EU subsidiaries. While some relief may be provided under existing Double Taxation Agreements (DTAs), these do not always provide full relief, and the process of claiming treaty benefits can be more cumbersome and subject to local administrative hurdles.

3. Interest and Royalties Directive:

The Interest and Royalties Directive abolished withholding taxes on cross-border payments of interest and royalties between associated companies in EU member states. The UK’s exit from the EU means that this directive no longer applies to the UK, impacting cross-border financing and intellectual property arrangements.

  • Withholding Taxes on Interest and Royalties: UK businesses receiving interest or royalty payments from EU companies may now be subject to withholding taxes, depending on the specific DTA between the UK and the relevant EU country. In many cases, existing treaties may not provide for full exemption, leading to increased tax costs and the need for businesses to revisit their financing and IP structures.

4. Merger Directive on Cross-Border Reorganisations:

The Merger Directive facilitated cross-border reorganisations within the EU by allowing tax-neutral treatment for certain transactions, such as mergers, divisions, and transfers of assets or shares. With Brexit, the UK can no longer benefit from this directive.

  • Increased Tax Costs for Reorganisations: UK businesses involved in cross-border reorganisations with EU entities may now face increased tax costs. Transactions that were previously tax-neutral may now trigger capital gains taxes or other charges in the absence of the Merger Directive’s protection. This can complicate business restructurings and increase the tax exposure for UK-based companies seeking to operate or restructure within the EU.

5. Changes to UK Direct Tax Legislation:

In the past, the UK had to align its direct tax laws with EU law to avoid infringing the EU’s fundamental freedoms, such as the free movement of capital, services, and people. Many EU legal challenges have historically led to amendments in UK tax legislation to comply with EU law.

  • Post-Brexit Autonomy: After Brexit, the UK is no longer bound by EU case law or directives in this regard. This gives the UK more autonomy to design its own tax laws, particularly in areas such as anti-avoidance, the taxation of cross-border transactions, and group relief rules. While this may offer the UK greater flexibility in crafting tax policy, it also introduces a degree of uncertainty as to how the UK’s tax regime will evolve outside the EU framework.

Summary of Key Implications:

  • Complexity in Cross-Border Transactions: The end of automatic EU directives (such as the Parent Subsidiary, Interest and Royalties, and Merger Directives) introduces new complexities for UK-EU transactions, often leading to additional tax costs.
  • Increased Administrative Burden: UK businesses must now navigate differing VAT regimes, customs procedures, and withholding tax rules across EU countries, resulting in higher administrative and compliance costs.
  • Need for Revised Structuring: Multinational businesses involving UK entities may need to restructure their operations, financing, and IP arrangements to mitigate the tax impact of Brexit.
  • Potential for UK Tax Reform: Freed from the constraints of EU law, the UK could pursue tax reforms that may diverge from EU norms, potentially creating both opportunities and challenges for international businesses.