As the Prime Minister triggers Article 50 and formally starts the Brexit process, it’s probably a good time for businesses to reflect on what we can sensibly say about how the UK tax system will change for small and medium sized businesses (SMEs).
Currently popular tax opinion is breaking down the likely major impacts of Brexit as follows:
- The most visible and probably painful change is likely to be customs duty. According to The Times 53% of imports (£223 billion) into the UK come from the EU. For decades most SMEs in the UK have been used to goods being moved around without any liability to duty or the imposition of tariffs. This now looks likely to change with all sorts of business beginning to consider how they would cope with additional administration burdens created by import duty and processes with those in the logistics industry predicting that getting products through customs will take much longer post Brexit. Thus for some businesses holding stock in the EU rather in the UK for despatch to the EU now looks like a sensible option. Having said all of the above there are some reports that the UK Government is hoping to agree that the existing customs duty exemption available in the Single Market can remain in place during Brexit negotiations, for up to ten years or when a new deal is reached, whichever comes first. At the moment of course no-one really knows whether this is likely and so planning for the worst case scenario seems sensible.
- It’s also likely that there will be a loss of the distance selling thresholds for VAT purposes. Currently for those UK businesses that sell direct to consumers, particularly online, typically they must register for VAT in the EU country where their customers are – but only once their local sales breach a threshold. Once the UK leaves the EU those thresholds will cease to be available and UK companies will fall immediately into local EU VAT rules meaning online retailers are likely to have to register for VAT in many EU countries where they do not currently have to. This may result in online retailers having to look at margins particularly where the overseas VAT rate exceeds the UK’s 20%.
- Withholding taxes generally apply (in an EU context) on dividends, royalties and interest. The UK has a very favourable treaty network, and together with those treaties in an EU context the ‘interest and royalties directive’ reduces the withholding tax on such payments between connected parties. This means generally speaking such tax liabilities within the EU are rare. However post Brexit the interest and royalty directive will be gone and the treaties with the likes of Germany and Italy do not reduce withholding taxes to zero as one might hope – thus we expect to see UK companies that are part of EU groups exposed to more withholding tax and this will be an unwelcome surprise for some.
- Many of us go on work trips all over Europe without noticing any impact upon our tax or social security position. The income tax side of things is dealt with by the tax treaty and this will not change, but the social security position is dealt with by an EU directive and so change is very likely coming in this area. Typically a UK resident person working in the UK will remain paying UK social security (NIC) even if he or she is posted abroad for a period of no more than two years – however upon Brexit the UK would cease to qualify for the benefits offered by that directive and foreign EU countries would then be able to levy local social security on the employee (and potentially employer) at the same time that a UK person was paying social security here – a very painful double charge. Whilst common sense dictates that this is unlikely to be the end outcome, there is very little time available to deal with such changes to the system and provide clear guidance.
No doubt like many businesses owners are ‘bored of Brexit’ but with the triggering of Article 50 firing the starting gun on exit negotiations, it is important that the challenges that are coming are recognised and that businesses begin to develop their own ‘plan for Brexit’ and engage with the developing stories which will affect their own businesses the most.
We’ve produced a Brexit checklist for your business to start to prepare for the opportunities and challenges ahead.
Stuart Rogers is Tax Partner with PKF Francis Clark, email@example.com