Even assuming an EU:UK Trade Agreement comes into force on 31 December 2020, the insurance sector is unlikely to benefit. Howard Jones explains why setting up a NewBro is the best solution to keep control of corporation tax and VAT.
Britain left the EU on 31 January and a transitional period is operating until the end
of the year. But there are doubts about how the service sector will be provided for in the future EU-UK Trade Agreement, if there is one at all. Many groups have already introduced measures to be able to continue trading.
From 1 January 2021, only an EU-regulated company and its approved persons may provide insurance services within the EU. To reassure their EU clients of their continued commitment, many UK brokers have set up a new broking company (NewBro) in an EU jurisdiction which is then approved and regulated by its local regulator. From there, NewBro is passported into other EU jurisdictions. The choice of NewBro’s location will be influenced by, where the group already has a presence, regulatory environment, the availability of local talent and proximity to clients, carriers or Lloyd’s Brussels.
One of the challenges has been satisfying the local regulator while at the same time not incurring significant expense by duplicating staff roles and systems currently working within the group. The ideal would be a light initial presence which expands in line with the business.
Another significant obstacle is how to mitigate tax leakage both on establishing NewBro and when managing the ongoing business.
Corporation tax on transfer of trade
In establishing the operations in NewBro, consider what’s being transferred to the company so that it can operate as a regulated broker. This is critical for tax purposes because any business transferred out of, or disposed of from, the UK is subject to an exit charge. When transferred between related parties, it will be valued on an arm’s length basis.
As the value of an insurance broker is often the value of its goodwill, which rarely has a base cost for tax purposes, the value of the business transferred would effectively be taxed at the
prevailing corporation tax rate of 19% in the UK. Careful planning will help to reduce tax exposure. But the starting point should be to transfer only what is required, and so reduce the value of the disposal. Also, depending on where NewBro is located, there may be some local tax relief for the business transfer.
Implications for VAT
It is important to also look at the impact of VAT on the transfer. Will it be subject to VAT or does it qualify as a Transfer of a Going Concern (TOGC)? Should it meet the TOGC requirements, the transfer would be outside the scope of VAT. But take care to look at the VAT rules from both a UK perspective and from the NewBro country’s perspective. Although VAT is a European-based tax, the legislation is interpreted and applied differently between the UK and various EU countries.
Operating structure considerations
In order to manage the cost base, especially in the early years, NewBro may outsource the insurance work back to the UK where it is currently performed. Many NewBros are opening a UK branch to help with outsourcing (called ‘back branching’). Services provided between a branch and its head office are usually outside the scope of VAT, as the services are all within the same company. Beware, though, as this is subject to local interpretation of the Skandia case.
But if the UK branch does not have the necessary insurance resource, it will need to acquire it from the existing UK group. You should undertake careful analysis of the services being provided by the group to be confident the correct VAT treatment is applied. Whatever VAT planning you implement in the UK, do also consider carefully its impact on the relationship between the branch and head office.
Unless otherwise agreed, from 1 January 2021 the EU tax directives will no longer have legal effect and, from a structural perspective, withholding tax on dividends and interest may arise – depending on where NewBro is located. Take care when using cross border management charges, as these may be subject to the Reverse Charge for VAT purposes.
Finally, the allocation of commission or recharge of expenses within the group may be subject to enquiry by any tax administration. It is therefore important to have adequate transfer pricing documentation to support your current position.
Clearly, the tax position is far from straightforward and requires some finessing between the UK and the EU jurisdictions – and also between direct and indirect tax. Your local PKF contact will be able to help you with this process.