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At the time of writing, Brexit has been postponed until 12 April 2019 and may be postponed again. With a Brexit outcome imminent in one form or another and Brexit a major factor in business planning, it is important for payments companies to understand both the tax implications of relocating and (if they choose to stay) how Brexit might impact the UK tax system.
Exit charges for those relocating
For those seeking to relocate prior to or in advance of Brexit, there will be tax issues to consider. The UK can impose exit charges where a company ceases to be resident in the UK or indeed where a non-UK company ceases its UK trade. This is because the company is deemed to dispose of all of its capital assets and immediately reacquire them at market value such that a chargeable gain (or allowable loss) arises. The company must also restate its intangible fixed assets, financial loan relationships and derivative contracts at their market value immediately before ceasing to be resident here. However, these rules don’t apply to a company that ceases to exist, or that continues to use the assets in a UK trade.
It may be possible for eligible companies to defer this charge in certain circumstances. An election must be made to HMRC within two years of the company ceasing to be UK resident, and so it is important that full advice is sought in advance.
On the administrative side, exiting companies must notify HMRC of their intention to leave the UK and provide HMRC with a statement of their outstanding tax liability as well as any arrangements agreed with HMRC for securing payment of that liability. Failure to notify HMRC will result in the company becoming liable to pay a penalty. A penalty may also be visited on the directors of the company if their actions led to the company’s failure to comply with these notification requirements.
Tax can often be a key driver for businesses deciding where to locate to. Ireland, the Netherlands and Luxembourg all remain popular locations from a tax perspective. Each of these has a low corporation tax rate as well as access to a large double taxation treaty network, which can help mitigate withholding tax and other tax charges on cross border transactions.
Of course tax considerations need to be weighed against the commercial impact of relocation in each case. The UK itself has a relatively low corporation tax rate (19%, to be reduced to 17% in 2020 and against the OECD average of 23.9%) and so tax savings may not be as great as expected purely by relocating.
Brexit and VAT
The biggest impact of Brexit on the UK tax system is likely to be in the sphere of VAT, as this is the main UK tax governed by EU legislation. This may be of less current interest to the payments industry due to supplies of financial services being exempt from VAT. Yet following Brexit, the UK will be free to determine its own VAT (or similar) system and impose its own rules.
However, the current VAT treatment of financial services is unlikely to change as the cost to UK business would be too great and any major overhaul would be costly and time-consuming. In the short term, VAT levels and procedures are likely to be kept much the same in order to provide some level of security and continuity for businesses.
Brexit and direct taxes
Outside of VAT, there are other taxes which are impacted by Brexit.
At the moment, employees living or working in both the UK and another EU jurisdiction can benefit from the EU Social Security agreements. These agreements mean that such individuals are only subject to the social security regime of one jurisdiction (rather than both) and are not taxed twice. The same benefit is applicable to their employers in respect of their social security contributions and can result in cost savings and a reduced compliance burden.
However, these agreements will cease to have effect following Brexit and such employees and employers may in theory be exposed to double taxation or administrative difficulties. It is not yet clear what the UK will do to prevent this exposure. However, one possibility is that the UK could follow Switzerland and re-sign the social security agreements as a non-EU member to ensure that the original regime still applies. Alternatively, new domestic legislation could be introduced (and draft legislation has been proposed in the event of a no deal Brexit). This remains an area of uncertainty for the time being.
Some UK companies also rely on EU directives to limit withholding tax on intra-group interest, dividends and royalty payments. The UK will no longer be subject to these directives after Brexit and this could lead to an increased withholding tax exposure. In other words, EU-based trading subsidiaries may impose withholding taxes on interest, dividends and royalty payments paid back to a UK holding company. It will therefore be important to review intra-group transactions and determine whether there are any additional tax costs as a result of these directives ceasing to apply.
Finally, the European Commission has since 2011 been discussing the possibility of a new financial transaction tax, applicable amongst EU members. However, no agreement has been reached and with the UK’s imminent departure from the EU, it appears less likely that any such EU-wide tax would apply in the UK.
Mark Braude is a Legal Director who leads the Corporate Tax practice at UK law firm TLT
Firm Twitter: @TLT_LLP
Pensions, Incentives and Corp Tax Twitter: @TLTPenTaxInc
TLT website: www.tltsolicitors.com
This guidance article was published through the Payments Association’s Project Regulator – supported by its Benefactor Ozan.
Project Regulator is focused on ensuring and shaping a level regulatory landscape for non-bank PSPs and EMIs in the UK. The project delivers this by engaging with regulatory bodies to promote and champion the regulatory concerns of Payments Association members and drive industry-critical change.