When the UK left the EU on January 31, 2020, nothing changed in terms of taxes for UK companies. During the transition period, which ran until 11 p.m. on December 31, 2020, under the terms of the Withdrawal Act 2018 (as amended by the Withdrawal Agreement Act 2020), most EU tax law continued to apply to the UK as though it were still an EU member state. The UK remained a member of the EU’s VAT scheme, customs union, and single market, and UK courts could also refer cases to the CJEU. The UK left the transition phase on January 1 and entered a new partnership controlled by the terms of the Trade and Cooperation Agreement (the “TCA”).

A Protocol on Ireland/Northern Ireland is included in the Withdrawal Agreement Act, which points out the arrangements needed to prevent a hard border in Ireland. This stipulates that Northern Ireland will remain a part of the UK’s customs territory and VAT area, but that it must also adhere to EU single market and customs laws (for goods, but not services).

VAT – how will Brexit affect VAT?

The VAT legislation in the United Kingdom is a combination of European and domestic legislation, and much of the case law arises from conflicts in the domestic courts of other EU member states. VAT accounts for about a fifth of the UK’s tax revenue, and the Government announced early on that the UK will continue to operate a VAT system in substantially the same form after leaving the EU, and has now enacted secondary legislation to allow this. UK VAT law as it relates to domestic (rather than cross-border) operations is likely to remain unchanged for the time being, with the possibility of some slight adjustments, such as the extent of zero and reduced rates.

The United Kingdom as a Third Nation

The UK’s current status as a third (non-EU) nation is the most important immediate change. Imports of goods from EU member states now have the same VAT status as those from outside the EU, meaning that imports from the EU will be subject to UK VAT. Importers who are VAT registered in the UK should be able to take advantage of ‘postponed accounting,’ which ensures that the import VAT will be included and paid using the next VAT return to help with cash flow timing. It’s uncertain if EU member states would aid customers importing from the UK in the same way.

The contingency steps suggested in the no-deal scenario remain relevant for UK businesses engaged in UK/EU cross-border sales: new EU VAT registrations (and, if required, the appointment of VAT fiscal representatives); familiarity with relevant VAT refund mechanisms operated by member states; getting up to speed with criteria for deferred accounting for import VAT; and, if engaged in digital.

What changes will be made to VAT?

To represent the equivalence of care for EU and non-EU customers, some improvements will be made to the UK scheme.

This includes legislation allowing the deduction of input VAT due to some financial and insurance services offered to EU customers, allowing previously unrecoverable VAT to be recovered.

It’s uncertain if there will be any further improvements. With effect from 11 p.m. on December 31, 2020, EU law has been integrated into UK law (the end of the implementation period). Historic CJEU rulings on retained EU law are usually binding on UK courts and tribunals unless overruled by the Supreme Court or Court of Appeal, or equivalents in Scotland and Northern Ireland, or, in limited circumstances, other stated appellate courts and tribunals (‘relevant courts’).

The UK has the right to change its VAT regime under these limits and according to the continuing obligations outlined in the TCA. The UK is conducting discussions on how financial services and funds will be handled in the future, which may suggest areas where the UK is considering making changes.

Should we foresee more improvements to corporate taxes in the United Kingdom as a result of Brexit?

Direct taxes (corporation tax, PRT, income tax, capital gains tax, NICS, IHT, stamp taxes) are outside the EU’s jurisdiction, although there are a few relevant direct tax directives due to EU law allowing EU legislation for the betterment of the internal market.

Due to the loss of benefits conferred by the EU Parent-Subsidiary Directive and the Interest and Royalties Directive, the withholding tax treatment of interest, royalties, and dividends paid between the UK and some EU group companies which adjust. Interest, royalties, and dividends paid intra-group between EU companies are not subject to withholding tax under EU law (in general). During the implementation period, the UK government announced that this status would be retained under domestic legislation for payments made by a UK business to an EU recipient. However, EU member states are not required to compensate the UK for payments made to them.

Where there is no clear domestic law allowing for relief, the situation under the applicable double tax treaty will continue and applications under the treaty will have to be made for a full or partial exemption under the relevant treaty. This means that payments from an Italian subsidiary to a UK parent, which were previously exempt from withholding tax due to the Parent-Subsidiary Directive, may now be subject to a 10% withholding tax.

That also ensures that the treaty claims must be made even though the treaty allows for zero retention. Businesses who have not already done so should review the withholding tax status for cross-border income transfers between group companies to ensure that the correct claims have been made.

Another problem with cross-border transfers is whether UK owners count as ‘equivalent winners’ for the purpose of restricting the benefits test of several US tax treaties. This test, in general terms, applies the benefits of the Treaty to a State resident who would otherwise have refused to comply with the benefits provision if its non-resident owners had been entitled to benefits if they had earned direct revenue.

These ‘equivalent beneficiaries’ would be EU, EEA or NAFTA members, whereas U.K. owners no longer have the position of shareholders. Absent U.S. concession, there could be consequences for non-EU businesses depending on the position of UK owners to benefit from tax relief in comparison to the U.S.

The corporate tax structure in the United Kingdom is domestic, but with European elements. Following the decision of the CJEU in Marks and Spencer v Halsey, the United Kingdom had to provide cross-border damage relief in order not to limit the freedom of establishment of taxpayers. Similarly, community relief claims have been allowed in respect of UK-resident branches of an EU parent since the 2000 Finance Act. It will now be available to the United Kingdom to consider laws to abolish cross-border loss relief, but it is less likely that the right to form intra-UK associations where there are non-UK shareholders would be affected.

There was talk that the United Kingdom could move to make the system more successful. While the provisions of the TCA limit the right of the United Kingdom to deviate from criteria intended to encourage a ‘fair playing field,’ they do not tend to preclude the United Kingdom from going in that direction as long as the steps adopted do not lead to subsidies or contravene OECD rules or standards.

Tax Transparency – continuing obligations and a major restriction of the reach of the DAC 6

The TCA includes responsibilities relating to good governance of the tax system and, in particular, to global rules on tax accountability, information sharing and general administrative collaboration and the principles of fair tax competition. It is followed by a number of Joint Political Statements, including a stand-alone Joint Political Statement on Harmful Taxation Regimes, which lays out a political commitment to the ideals of combating harmful tax regimes and represents the work of the OECD under Action 5 of the BEPS Action Plan.

A significant change in relation to DAC 6 is the recent EU mandated notification regime requiring the reporting of cross-border agreements where features meant to be representative of active tax preparation are identified.

The United Kingdom Government has very greatly narrowed the scope of the DAC 6 regime in the United Kingdom, so that only agreements falling under Hallmarks D1 or D2 are maintained. This excludes from the UK system the hallmarks that caused the most concern and complexity and usually ensures that only arrangements that contradict or bypass the Traditional Reporting Standard (CRS) reporting or obscure beneficial ownership may be reportable.

The retention of this member of the regime represents the willingness of the United Kingdom under the TCA to enforce OECD minimum requirements against BEPS (in particular, the OECD Model Mandatory Transparency Regulations for CRS Avoidance Arrangements and Ambiguous Offshore Structures).

Perhaps even better news from a compliance viewpoint is that, while DAC 6 allows for the reporting of agreements from 25 June 2018, HMRC has clarified that the reporting scope limitation would not extend to these historic arrangements.

It seems likely that the HMRC was able to draw this decision on the grounds that the reporting requirements have not come into force until 1 January 2021 and that the substantive reporting requirement in the Regulations (as now amended) only contains the D-marks. This suggests that very little monitoring is likely to be needed under the UK regime. Of course, the fact that no documentation is required in the United Kingdom does not mean that reporting standards under the national regimes of EU Member States do not need to be considered.

European Tax Litigation – How can the Brexit impact EU Tax Law Litigation?

Over the last 15 years, we have had major lawsuits focused on the incompatibility of the United Kingdom’s historic tax code with European law (more specifically, with the fundamental freedoms). Where the laws of the United Kingdom have been determined to be unconstitutional by the CJEU (triggering awards of compensation), the consequences on (a) historic and (b) ongoing cases may have to be weighed.

The United Kingdom Parliament could decide whether it wants to pass new legislation on these multi-billion-pound claims; while prior efforts to do so were themselves subject to challenge under European law, post-Brexit legislation will not be met with this specific obstacle. However, recent rulings of the Supreme Court have greatly narrowed the reach of all lawsuits and the amount of damages available.

There will be no further appeals to the CJEU by the United Kingdom Courts and future judgments of the CJEU will be treated on a discretionary basis by the United Kingdom courts. UK courts will not be bound by any of the rules set down or judgments reached by the CJEU until 1 January 2021. Retained EU case law would be binding on courts rather than those referred to as ‘relevant courts’ (discussed above).

However, the Removal Act potentially preserved the status quo in the light of objections to the legitimacy of EU law held and non-compliance with EU law in tax litigation proceedings if:

• Started, but not eventually determined, until 1 January 2021, or
• commenced within three years of 31 December 2020 whether they include objections to something that happened before the day of departure, whether the obstacle is disapplication or quashing the Act of Parliament or the rule of law. The time limit of three years is shortened to two years for Francovich claims for non-compliance with EU rule.