UK companies that do business with the EU need to read the small print on current cross-border regulations. Chris Riley provides guidance.
When the transition agreement ended on 31 December and the UK formally left the EU, many news stories focused on the new complexities for businesses with their cross border transfers of goods. But there are other, less apparent, changes that could challenge UK groups with EU operations.
Interest, royalties and dividends
UK companies may once have relied on EU directives to stop withholding taxes being applied on payments of these items between group companies based in the EU. Since 1 January the directive no longer applies to payments made to UK companies from that date. In the March budget, it was also confirmed that the rules will not apply to payments made by UK companies, but from 1 July 2021.
In many cases, the UK’s extensive tax treaty network will still mean withholding taxes do not apply to such payments, or will reduce the rate assessed. The UK doesn’t apply withholding taxes on dividends paid, in any case. But groups that previously relied on the EU directive may need to reapply to relevant local tax authorities for treaty-based relief, if the conditions are met.
Under EU rules, specific provisions apply to ensure that where employees move between, and work in several, EU jurisdictions they only pay social security in one country at a time. This cuts down considerably on administration and potentially reduces costs, as social security rates within the EU vary significantly.
Now outside the EU, these automatic provisions no longer apply to the UK, although arrangements for existing mobile employees will remain until their expiry date. But there has been concern that leaving the regime may cause real complexities in the future.
The good news is that the UK has now agreed bilateral arrangements with all EU jurisdictions confirming the same principles will be followed at least in the near term. But the risk remains that these will not be renewed by all countries as time passes. The tax impacts of cross border working may be reduced while travel opportunities are limited, but this is a key focus for tax authorities around the world, not only in the EU.
Cross border goods and VAT
One of the key impacts of the end of the transition phase has been VAT from 1 January 2021. UK businesses exporting goods to EU customers can no longer rely on their UK registration to simplify the EU VAT process, either on imports or on sales to the end customer. They must now register in each EU jurisdiction where they have significant sales (typically, over €35,000 per year per country).
This issue should be simpler from 1 July 2021, when UK (and other non-EU businesses) exporting to the EU can use the Import One-Stop-Shop to register as importer of record for all sales into the EU. This will be a single cross-EU registration to account for VAT arising on all EU sales in a single composite EU return.
Cross border services into the EU
The supply of services to non-EU recipients is a complex area. In general, UK VAT should no longer be applied regardless of the recipient’s VAT registration status. The exception is where the services are performed and enjoyed in the UK (such as hospitality or travel services).
Intra-group services between VAT registered businesses are therefore unaffected by this change, as UK VAT will not be charged. But the requirement to apply the reverse charge locally will continue, where relevant, and businesses – particularly those which are partially exempt – will need to keep on top of requirements to protect against future challenge.
DAC 6 out, OECD in
DAC 6 is an EU framework to report certain cross border tax transactions and arrangements to tax authorities, particularly where there is a history of tax motivated transactions or tax imbalances created by the arrangements. In some cases, arrangements can be reported even if there’s no tax motive behind the transactions.
Despite Brexit, the UK was a party to these rules, which took effect from 1 January. Perhaps surprisingly, we cancelled the introduction of DAC 6 in the UK, opting instead to adopt the (far more limited) OECD framework from the same date.
It means that for many of the DAC 6 categories there is no UK reporting obligation after all. But where transactions involve EU companies, reporting will still be required in the EU jurisdiction – even where any tax advantage accrues in the UK. Groups with EU companies must therefore be aware of, and apply, these potentially onerous regulations.
Stay up to date
So while the media may have focused on the post-Brexit risk of delays at the border, the associated costs are at least limited to the consignments in question and should be captured at the time.
The more subtle consequences are harder to identify. Where issues arise from a change in circumstances, the value of the associated tax risk could build over many years. Groups with cross border services, employees and recharges involving EU entities need to keep their arrangements updated, in line with any changes, in some cases on a country by country basis.
If you would like further guidance on the issues in this article, please contact Chris Riley.