Whenever the topic of Brexit is mentioned, we never seem to hear anything concrete in terms of what is actually going to happen. We know change is on the way but no-one knows what that change looks like.
The same can be said when considering the tax impact of Brexit. No-one knows what rules will change as a direct result of leaving the EU or what will change as a result of change in policy as the shackles of EU legislation are removed. However, we do know change is on the horizon and businesses need to be mindful of what they can do now to mitigate the risk of adverse consequences.
In truth, all business can do is look towards the possible changes and react to best protect themselves from the risk those changes could pose.
Take for example the possibility of the UK ending up with an unfavourable trade agreement with the EU. Currently goods imported into the EU are subject to customs duties. Once in the EU the goods are in ‘free circulation’. This means that an export of goods from the UK to a customer in another EU territory will not suffer the cost of duties.
If the UK is no longer part of that trade arrangement, the export of goods from the UK to an EU territory will be liable to customs duties. The question is, who would bear this cost? If it’s the UK business then profit margins are going to be reduced. If it’s the end customer, then the UK business may become less competitive on price with EU rivals. UK businesses need to start thinking of how they will deal with this outcome if it arises. Do you need to consider obtaining Authorised Economic Operator status, to alleviate some of the pressures?
Looking at cross border group structures, in many cases the payment of royalties, interest and dividends intragroup from one EU country to the UK will be free of withholding tax (WHT). On exit from the EU, the UK may no longer be party to the various EU directives which provide the benefit of 0% WHT. Instead, it will be necessary to revert back to the relevant double tax treaty to determine whether relief can be obtained under the terms of the treaty. Understanding the potential impact on group structures and transaction flows is vital as it may be necessary to restructure the group and/or terms of intragroup agreements.
UK business should be considering the potential impact of Brexit on long term agreements and contracts. As mentioned above, if duties become payable on goods, does an existing long term supply contract with a customer specify who will pay the duty? Conversely, if importing goods from the EU into the UK, will the UK business face a liability to pay duty under the terms of the existing agreement?
Quite often a contract/agreement will include a grossing up clause. This means that the party receiving payment under the terms of the agreement receives payment gross of any WHT. For example, if due to receive £100 and WHT is 10%, the payer would need to pay £111 and deduct £11 WHT to ensure the recipient receives £100. This could have a significant impact on UK businesses profitability and cashflow, especially if the UK business is making the payment. Existing contract/agreements should be reviewed to determine whether this is an issue and should also form an important consideration when negotiating new terms in the future.
There are plenty of issues that need to be considered and adopting a ‘wait and see’ strategy is potentially dangerous. In particular, I recommend that existing group structures and long term sale/service agreements are carefully reviewed to ensure the UK business is protected from a ‘harsh’ Brexit.