What do companies need to think about in their preparation for Brexit and what changes in VAT and customs regulations in the UK might take place? It can definitely be said that the level of uncertainty is major in terms of how companies’ tax situations will be impacted by Brexit.
One of the decisive factors in Brexit is the agreements which the UK can negotiate with the EU. It is important to note that the UK will no longer have access to the EU’s free trade agreements so the UK would need to negotiate such a treaty on its own. There are, primarily, four potential routes for the UK to choose and these choices are dependent on how the negotiations proceed with the EU and the degree to which the UK will participate in EU cooperation after the exit. Other factors, which can affect the situation, are changes in the political landscape, as many countries are facing national elections within the next few years.
We see four major Brexit scenarios:
- EEA membership (Norwegian model) – The UK would continue to be seen, in this case, as a part of the EU market and would continue to comply with EU legislation. The free movement of goods, services, labour and capital would continue, while the UK’s influence on formulating legislation would be reduced.
- Bilateral agreement with the EU (Swiss model) – In this scenario, the UK will be similar to Switzerland in that it will negotiate separate agreements with the EU and, to a certain degree, have similar types of cooperation as Switzerland has within certain areas, which can imply the free movement of goods but not for services. Here, as with the above alternative, the UK’s influence over legislation within the EU will be reduced.
- Free trade agreement with the EU (Canada model) – The UK enters into a free trade agreement with the EU implying the free movement of goods but not services. This model means that the UK has no obligation to contribute to the EU budget and neither does it incur right of free movement of people.
- No agreement is entered into (WTO, for example, USA) – If no agreement is entered into between the UK and EU, there is no free movement of goods and services and cross-border trade will be subject to standard custom fees based on the World Trade Organization (WTO) fees, which can imply increased costs. The relationship between the UK and EU is cut off in a much more definitive manner than in the case of the three previous alternatives.
Depending on the company’s specific operations involving the UK, preparations prior to Brexit can be undertaken in a variety of ways:
- A let’s-wait-and-see strategy, where nothing is changed for the time being in order to avoid undertaking unnecessary processes in a situation of uncertainty,
- A preventive strategy, reviewing the potential measures that can be necessary,
- A more proactive strategy where measures are taken already at this point in time.
The different strategies are dependent on the company’s risk willingness, financial position and other capabilities. Important areas to consider are, amongst others:
Operational questions: Where should the company’s head offices be located? Are there savings, which can be made? Should logistics and suppliers chains be identified/Mapped and changed? Can the free movement of personnel be impacted? A consequence analysis should be prepared to determine who will be impacted by Brexit and in what manner they will be impacted.
Financial questions: Does an investment plan, alternative refinancing plan need to be prepared?
Structural questions: Does the company have the right group structure? Is restructuring of the legal structure required? Can further tax expenses arise, for example, customs in transporting goods and in dividends from subsidiaries?
It is also important to analyse the costs and advantages in conjunction.
Currently, the UK has no national customs regulations. Instead, the EU regulations are applied. Due to Brexit, there will be the need to produce new customs legislation and there will very likely need to be changes in the customs and VAT areas, which impact imports and exports.
After Brexit, tax at source could apply on dividends in certain cases. As tax at source is also regulated in the double taxation agreements, each agreement the UK has with another country will be of decisive significance. In consideration of this factor, it is important to review your group structure and where the companies within that structure are located.
Feel free to contact us if you have any further questions regarding the manner in which your company should react in dealing with these forthcoming changes.
Christina Aronson och Anna Kristenson
010-212 52 08
+46 10 212 52 08