tax effects of a no deal brexit, custom duties, VAT, value added tax, direct taxes

With Boris Johnson as Prime Minister, there is now a real possibility that we might leave the European Union on 31 October, perhaps without a “deal”. The main immediate tax effects of this are likely to be as follows:

1. Customs Duties

The May government proposed a temporary tariff regime for a no deal Brexit in March 2019, and there is no indication that the Johnson government intends to change this. In the main tariffs on most imported goods will be reduced to zero. This can be expected to lead to a reduction in the cost of goods imported from outside the EU, with large tariff reductions being introduced on everything from jam to televisions, from carpets to spoons.

Exceptions to this general rule include imports of beef, lamb, pork, poultry and some dairy where high tariffs (circa 35%) will be introduced. Also tariffs on finished vehicles will be retained. From 31 October these tariffs will also apply to goods imported from the EU (so buy your BMW now!). A link to the May government proposals is here:

Exports to the EU will be subject to EU tariffs. These are generally low (circa 4%) and the decrease in the value of sterling has already compensated exporters for this. Again the main exceptions are food and cars.

2. Value Added Tax

VAT will remain largely unchanged. However, the method of accounting for VAT on goods imported from the EU will change, and this is likely to provide UK businesses with a cash flow advantage. Businesses exporting goods to EU consumers will be able to zero rate those sales. Some services (e.g. accountancy) provided to non business customers (e.g. private individuals) in the EU will be outside the scope of VAT, representing a 17% price reduction to the end user.

Here is a link to the government’s proposals in more detail.

3. Direct Taxes

Direct taxes will be largely unaffected by Brexit. However the EU Parent Subsidiary Directive, and Interest and Royalties Directive, would cease to apply. Therefore, for example, a dividend received by a UK parent from a german subsidiary would carry a 5% german withholding tax (currently nil). UK companies with subsidiaries in certain EU countries should therefore consider repatriating profits etc before 1 November. If necessary in some cases it might be possible to rearrange matters, employing for example a dutch sub-holding company (the Netherlands does not levy withholding taxes). If any such restructuring is contemplated it needs to be undertaken with care, and will probably be more easily accomplished before 1 November.

Further details are available here.

Should you have a tax-related enquiry or wish to discuss anything mentioned above in more detail, please contact Dominic Crilly.

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