The UK exited the EU on 31st January 2020. The transition period in the Withdrawal Agreement ended on 31st December 2020. Existing EU Treaties, EU free movement rights and the general principles of EU law now no longer apply in relation to the UK, save in certain limited circumstances set out in the Withdrawal Agreement, such as EU legislation falling within the Northern Ireland Protocol, and ‘retained EU law’, being EU law as it applied to the UK on 31 December 2020 which now forms part of UK domestic legislation (by virtue of the European Union (Withdrawal) Act 2018) to the extent that they are not modified or revoked by regulations under that Act.
The EU and the UK negotiating teams have agreed the terms of a detailed post-Brexit Trade and Cooperation Agreement (the “TCA”) which has been given effect from 1st January 2021. This article is part of a series of articles which outlines the implications of the TCA and Brexit on UK taxation, now that the transition period has ended.
The TCA and Tax
The TCA does not set out significant detail in respect of tax matters (except on the new rules of origin – see below).
It includes broad terms where the UK and EU have committed to implementing principles of good governance in tax matters and to upholding relevant global standards on tax transparency, exchange of information, fair tax competition, anti-tax avoidance, mutual assistance, with improved cooperation in respect of VAT and customs with a view to combating tax fraud and breaches of customs legislation. This approach is to build upon and implement international agreements involving the OECD. In particular, the UK and EU have reiterated their support for the OECD Base Erosion and Profit Shifting (BEPS) project and to applying the principles of countering harmful tax regimes, reflecting the work done by the OECD in this area. Both the EU and UK have also agreed not to dilute their current rules below existing OECD standards on exchange of information, controlled-foreign companies, interest limitation, hybrid mismatches and on public country-by-country reporting by financial institutions, as well as a new Protocol on social security coordination.
In looking at how the TCA specifically affects tax matters for clients, we would note as follows:
- the TCA does not constrain future development in the UK’s domestic tax regimes or tax rates, so the UK may deviate from EU tax rules in the future, for example, in line with or beyond OECD minimum standards (e.g. digital services tax). As noted in our article, the UK has already narrowed the scope of reporting required under DAC6 (the EU’s tax reporting Directive 2011/16) in readiness for replacing DAC6 with rules implementing the OECD’s mandatory disclosure standards. Future GB tax policy will no longer be subject to EU State Aid considerations although instead it may be affected by e.g. the TCA’s subsidy and level playing field provisions.
- Until 31 December 2020, UK businesses had been able to trade with the EU free from customs duties and without the need for customs declarations or meeting “rules of origin”.
- From 1 January, new barriers to trade with the EU now exist from a tax perspective – the TCA does not alter the fact that the UK has left the EU’s VAT Single Market and Customs territory (save in respect of Northern Ireland relating to goods).
- Complex border procedures now must be met as goods traded between the EU and Great Britain (GB) will be imports or exports. Businesses face these procedures now when importing to an EU country, whereas a 6 month phased approach to customs declarations for most goods (until July 2021) has been offered to businesses importing to the UK.
- In the longer term, the EU and the UK government will “endeavour” under the TCA to establish a single window that enables traders to submit documentation or data required for importation, exportation, or transit of goods through a single entry point to participating authorities, with a view to reducing administrative burdens on business.
There is mutual recognition of “trusted trader” (Authorised Economic Operator (AEO)) accreditation schemes in the UK and EU, allowing accelerated customs clearance for AEOs, although this effectively means that the UK’s regime must continue in a similar form as now to maintain such recognition.
The TCA aims to preserve the free flow of trade by providing for the movement of goods between the UK/EU to be tariff, duty and quota free but this is conditional on the goods satisfying complex “rules of origin” which will apply to the particular product in question. These rules are set out in detail via a number of Annexes to the TCA. The rules are product-specific and take into account a range of factors including the nature of a product’s components, where it was produced/processed and/or assembled, and the product’s Harmonized System (HS) code and tariff classification. No one rule fits all.
Broadly, to benefit under the TCA, goods will have to be of UK or EU origin and must have been sufficiently worked or processed/assembled (i.e. transformed) within the UK or EU in line with the relevant product-specific rules. In particular, a product will be considered "originating" if (i) it is "wholly obtained" in UK/EU; (ii) if it is produced in the UK/EU exclusively from originating materials, or (iii) if certain non-originating materials incorporated in its production satisfy certain rules and/or tolerance thresholds such as in terms of value or weight. Materials originating from the EU, as well as production carried out within the EU on non-originating materials, may be considered as originating in the UK (and vice versa). The key issue arising from these new rules of origin is for businesses with existing inventory in the UK or EU which consists mainly of non-EU materials and non-EU processed products. Their products will not qualify as originating from the UK or EU and may suffer double taxation on shipment to EU or UK consumers (e.g. China – EU – UK). To mitigate these risks, the future use of bonded warehouses for non-EU inventories may need consideration.
Subject to transitional rules to 31 December 2021 on supporting paperwork, businesses will also need to hold proof that the goods meet the rules of origin when making their claim for preferential TCA rates in their customs declarations - this can take the form of self-declarations (the TCA provides text for these), being a Statement of Origin on a commercial invoice or other commercial document describing the goods completed by the exporter, or by the importer applying importer knowledge that the goods are originating together with supporting documents from the exporter, rather than certificates from customs authorities. Failure to do this may result in EU or UK custom duties being payable. A limited exemption from the requirement to hold formal proof of origin applies to small parcels of goods valued under €500/€1,200 for imports within personal luggage (EU) and under £1,000 for UK imports.
Goods that do not meet the rules of origin can still be traded but they will not be able to benefit from preference under the TCA and may be subject to standard import tariff rates that the EU and UK apply to imports. For imports into the EU, this will be their Common External Tariff. For imports to the UK, this will be the UK Global Tariff.
The TCA does not cover trade between the EU and Northern Ireland (NI), which is governed by the Northern Ireland Protocol to the Withdrawal Agreement. Special and complex VAT and customs rules will apply in respect of Northern Ireland particularly as goods entering Northern Ireland from Great Britain will still constitute imports from 1 January 2021, and to understand future EU/UK customs duty implications for movements of goods into Northern Ireland, it will be important to consider the UK-EU agreed criteria (published 17 December 2020) for the determination of goods “not at risk” of entry to the EU Single Market. See here for further details.
Key Tax points
See here for our summary of the key tax points for trade in goods and services from 1 January 2021. This covers general VAT & customs changes from 1 January 2021, the new VAT rules for e-commerce sales of goods/consignments valued at £135 or less to GB customers and their impact on overseas sellers or online marketplaces facilitating such sales, requiring VAT to be charged and accounted for by the seller or marketplace at the point of sale rather than upon import, and key direct tax implications for businesses post-Brexit, such as EU withholding tax costs absent treaty relief.
Businesses should review their supply chains and international tax strategies to determine whether, and to what extent, they should be adopting alternative and cost-efficient approaches to effect business in the post-Brexit environment. Supply chain issues remain a key risk particularly if future shipments encounter difficulties at the UK or EU border, including increased costs and delays. Particular areas for attention should therefore be on ownership terms and who is to act as importer, pay the import VAT and reclaim it (noting HMRC’s guidance that only owners at the time of import can reclaim UK import VAT), customs compliance and representation, delivery and transportation, liability and responsibility in the event of delays.
Businesses will need to take a commercial decision on whether it is in their interest to meet (and prove that they meet) the rules of origin in order to benefit from the TCA’s zero tariff treatment. Business supply chains also need to understand the new self-certification procedures for proof of origin and address the risk of non-compliance or customs authority enquiries. This includes reviewing HMRC’s latest detailed guidance document for business ‘Rules of Origin for goods moving between the UK and EU from 1 January 2021’ (29 December 2020), which seeks to explain the most important provisions which businesses will need to understand and comply with in order to obtain zero tariffs/duties under the TCA when trading with the EU.
Businesses which have relied on EU VAT simplifications to avoid multiple registrations may need to consider a number of options: restructuring their supply chain including transport arrangements to obtain an EU VAT number, warehousing goods for the EU market in the EU, or setting up a new EU establishment to intervene in future supply chains for import/export purposes (to avoid customers having to deal with import complexities and so as to be able to access EU VAT administrative flexibilities).
Businesses should likewise ensure that they are familiar with the procedures and additional administration required for VAT and customs reporting on imports and exports into and out of the EU/UK, as well as non-tax regulatory requirements which may need to be met such as EU health and safety, labeling and import/export licensing requirements on a per EU country basis. EU exporters bringing goods to the UK will need to meet similar UK requirements (noting differences in respect of Northern Ireland). Businesses should review the UK’s latest Border Operating Model and case studies which help explain how the GB border with the EU should work post-Brexit and consider whether they can have a duty deferment account in the UK for payment purposes, and/or be eligible for customs declaration simplifications or deferrals or other authorisations, as well as what IT/pre-registration requirements must be met prior to shipment and what their carriers will need so the goods can depart.
E-commerce sellers / retailers should review their supply chains, contractual terms and price structuring to ensure they cater for the new rules on low value imports valued under £135 to the UK (as well as for their EU transactions under EUR 150 from July 2021), and to allocate risk appropriately. To mitigate future duty costs for non-EU stocks, retailers may need to ensure their products are imported to consumers direct from the non-EU country or look at using e.g. customs bonded warehouses to store non-EU inventory due for cross-border shipments.
From a direct tax perspective, businesses will also need to consider whether they can rely on double tax treaties to receive payments of dividends, interest or royalties from EU companies free of withholding and whether it is now necessary to apply for relief under the relevant double tax treaty.
The UK's exit from the EU combined with the end of the transition period on 31 December 2020 have immediate effects from a tax perspective, and businesses should, to the extent they have not already done so, urgently review their tax position and prepare for the additional administration and changes that have arisen from 1 January. Although the TCA provides welcome relief in providing a framework for zero tariffs and duties, equally valuable relief in the form of simpler border administration will take considerable time to evolve as part of future discussions which necessarily will need to continue between the UK and EU on the implementation of their relationship pursuant to the TCA.