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What Are The Tax Changes & Implications After Brexit?

December 3, 2020

In the short term, the UK’s departure from the EU will likely have little immediate impact on direct or indirect taxes. The amount of trade the UK does with EU Member States is so substantial it will not change overnight. Without an agreed trade deal, uncertainty around trade tariffs as well as import and export taxes still looms for both sides.

To protect your clients and help them weather the financial storms that Brexit may bring, it’s important to know what we can expect when negotiations are done, and a trade agreement is reached. 

Continue reading to learn how leaving the EU will implicate direct and indirect tax systems, and what new VAT regulations are projected for EU and non-EU countries.

How Will the UK’s Tax System Change After Brexit?

Although Britain technically left the European Union on January 31st, its relationship with the EU remains the same in practice until December 31st when the transition period is supposed to end. 

While the UK government might change its approach to taxation after the succession, some post-Brexit arrangement models will likely require it to continue to adhere to the EU’s direct tax obligations.

Direct tax implications

Direct tax is likely to take the smallest hit from Brexit. The reason being that direct taxes are not expressly dealt with by EU Treaties, which authorise the European Council to issue directives to laws, regulations and provisions that directly affect the UK’s internal market.

Should the UK leave the EU but remain within the European Economic Area (EEA), the British government must ensure its domestic laws continue to comply with the EU Treaty Freedoms since they are broadly the same in the EEA Agreement as the EU Treaties. 

Indirect tax implications

For indirect tax, Brexit will likely cause several implications on Customs Duty and VAT, especially in the event of failing to reach a formal trade deal. The UK would need its own taxation systems and transactions to and from EU states would become imports-exports, potentially affecting trade systems and cash flow. Other industrial taxes such as Air Landfill Tax will be largely unaffected. 

The UK currently finds itself in unchartered waters, having not negotiated trade agreements in the years leading up to Brexit. It’s difficult to predict how long the negotiations will take, but we’ll see no effect on taxes in the short term as the customs union will be preserved until the UK actually leaves the EU with an agreed trade deal.

Changes To VAT After Brexit

The government’s technical guidance for businesses preparing for the end of the transition indicates the UK will continue to have a VAT system even after it leaves the EU.

If the UK doesn’t negotiate a trade agreement with the EU, Customs Duties and import VAT will be significantly impacted post-Brexit. Prices of exports and imports between the UK and EU will rise, making the UK a less attractive option for EU purchasers. In turn, the costs for the UK’s purchases from the EU will also increase. 

The UK currently operates under a number of constrictions when it comes to charging VAT rates, which could ease depending on the terms of the final agreement and give the UK more flexibility.

How will Brexit change VAT on cross-border goods?

After Brexit, the UK will no longer be part of the EU VAT area and will become a third country. This transition will change how businesses manage VAT on goods and services from EU countries to Britain, and vice versa. Sellers won’t charge VAT, but buyers will have to pay tax to HMRC at the point of import, alongside applicable customs duties.

Paying VAT at the border will also have potential cash flow consequences, which the UK government wants to mitigate for imports by introducing postponed accounting for import VAT. The hope is to shift the accounting and payment away from the border to the VAT return. Postponed accounting would also extend past EU countries to include imports from the rest of the world.

VAT change in Northern Ireland after Brexit

The rules on cross-border VAT will be different in Northern Ireland, in accordance with the Withdrawal Agreement.

Even after Brexit, Northern Ireland will continue to trade with the EU under the same conditions as now. Business-to-business exports will be exempt from VAT, which the purchaser will pay at their locally applicable rate. Because the rest of the UK will be outside the EU VAT area, there will be a new VAT border in the Irish Sea, meaning Northern Irish customers buying goods from Britain will need to pay VAT. However, they will pay it to the HMRC rather than their supplier.

Individuals and overseas businesses will also be affected as the rules for packages entering the UK will change, and the Low-Value Consignment Relief for parcels valued as £15 or less will be scrapped on those arriving from the EU.

How Brexit will change VAT rates on services

The EU VAT rules for services depend on the nature and location of the service, and who receives it. Specific regulations regarding the export of financial services are under consideration, and the government has shared few details thus far.

UK suppliers of digital services to EU non-business consumers using the EU’s Mini One-Stop Shop (MOSS) scheme will need to move to the ‘non-Union’ scheme to account for their sales. Businesses established in non-EU countries using the UK for their MOSS VAT return will have to move their identification to a EU27 member state to continue using the non-Union scheme.

Prepare For Post-Brexit Tax Changes with INAA

Even without EU legal constraints, the UK is unlikely to develop entirely new tax systems once the transition period comes to an end. The EU direct tax restrictions are relatively minor, and many other countries are starting to focus on a territorial system of corporate tax. 

There is also a worldwide focus on VAT systems with many emerging economies introducing them, meaning it would be surprising if other national governments make any fundamental changes in the future. Nonetheless, some models will give more flexibility to future governments, making minor changes more likely. 

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