No-Deal Brexit Creates Tax Chaos For Corporates

UK Prime Minister Theresa May's Brexit deal was overwhelmingly defeated in parliament yet she survived a no-confidence vote, setting the stage for a no-deal Brexit to take effect on March 29. In a new web series,Global Financeexamines the impact of the Brexit vote and a no-deal scenarioon M&A, corporate taxes, the Capital Markets Union(CMU), and foreign exchange.

Brexit and taxes:In the best-case scenario, the negotiated agreement of aso-called “soft Brexit” would spare CFOs some headaches. But if the UK crashes out of the European Union (EU) on March 29 without any deal—which grows increasingly likely with each passing day—it could have dire consequences.

According to tax lawyers advising clients on both sides of the English channel, companies weighing up the implications of a no-deal Brexit may find that the biggest tax pain will come from movinggoodsin and out of the UK.

Julien Monsenego is a Paris-based partner with international law firm DELSOL Avocats. His firm has been helping companies prepare for various scenarios, from soft Brexit to no-deal, the latter being the worst-case scenario. His work covers the possible implications for corporate tax and the impact of changes to VAT and customs on logistical operations.

“This last topic is probably the most worrying, as certain simplified procedures for exportation and simplified procedures for filing and recovering VAT are relying on an EU status,” says Monsenego, adding that, in the case of no-deal, service providers assisting clients on customs or VAT formalities will no longer be able to do so as they will only have had experience in intra-EU operations. He also observes that companies have already looked at group restructuring and have moved goods to UK warehouses in anticipation of customs delays after the March 29 Brexit deal deadline.

His concerns are echoed by Kathleen Russ, a London-based partner with the tax department of law firm Travers Smith. Russ says the key tax concern with a no-deal scenario is customs duties. In the case of a disorderly exit, the UK would hope to be able to rely upon the World Trade Organization’s (WTO) ‘most favoured nation’ tariffs when trading with EU and non-EU countries—if such a tariff schedule is agreed with other WTO members.

“UK businesses with intricate cross-EU supply chains, or those which rely on ‘just-in-time’ supplies of goods, will be most affected by any resultant disruption, especially in the short-to-medium term,” says Russ. She explains that UK customs duty and import VAT would be due on EUimports and that traders would need to submit an import declaration, with associated border checks, with similar issues arising with imports from the UK into Europe.

A softer Brexit—which depending on the final agreement could involve continued European Economic Area (EEA), or even customs union, membership—offers a better outcome from a VAT and customs perspective. Monsenego says a deal in which the UK joined the Common Transit Convention would be most welcomed. However, Russ notes that the EEA agreement does not cover VAT.

“Whilst the UK is very unlikely to replace or abolish VAT, it could, over time, tinker around the edges, departing from EU VAT law that is contrary to the UK’s preferred policy outcomes,” she says. “The UK would also have this freedom if it entered a customs union with the EU that did not create a VAT area between the UK and the EU.”

Corporate tax issues resulting from Brexit are characterised as comparatively “manageable” by Monsenego, with the corporate tax status quo remaining much the same in the case of a soft Brexit. To what extent it remains the same depends on the details of soft Brexit agreements.

“Generally, the UK has the competence to set its own tax policy, so, in a broad sense, the UK corporate tax position should not alter significantly,” adds Russ. “As a member of the EU, UK law is required to be consistent with certain EU fundamental freedoms and state aid provisions, which prevents the UK from applying selective or discriminatory tax measures which could distort competition within the EU single market.”

Without a deal, it would be a different matter. As a result, Russ says, corporate multinationals are reviewing their group structures to assess whether a no-deal exit cause problems for “existing tax grouping relationships, consolidations and treaty reliefs”. She adds that clients are looking at how the loss of certain EU-tax directives, which eliminate withholding taxes on cross-border payments, will impact on profit repatriation between jurisdictions.

There is also the issue of what UK’s future tax policy will be in the case of a full divorce from Europe. At the start of the year, UK foreign secretary Jeremy Hunt controversially hailed Singapore as a model for post-Brexit Britain, with some commentators interpreting that as a desire for the UK to emulate the city-state’s low tax, low regulation regime.

This concern is repeated by Monsenego, who notes that the UK will no longer have to comply with EU rules. This could mean that it will use tax rates and beneficial tax provisions once considered as not compliant with EU rules. He adds: “It may well be that we are seeing ‘tax-dumping’ measures from the UK to attract and preserve more business domestically shortly after Brexit.”