Given that there are a number of alternatives to full membership of the EU, the extent of any future tax changes will ultimately be determined by the outcome of Brexit negotiations. However, as customs duty and VAT are EU wide taxes, it is likely that these will be impacted more by Brexit than other taxes. Some comfort can be taken from the fact that in the event that a withdrawal agreement is reached, any tax implications arising from Brexit should not have an effect until after the proposed transition period ends on 31 December 2020.
The intra-community acquisition of goods occurs where goods are transported between businesses in different EU Member States. The acquiring business should be required to account for the VAT arising on the intra-community acquisition in its periodic VAT return.
Should the UK leave the EU Customs Union and Single Market, the EU’s VAT regime will no longer apply in the UK. Goods moving from Ireland to the UK (or vice versa) will become subject to import VAT. While the amount of VAT arising on the import of goods should effectively be the same as the amount of VAT arising on an intra-community acquisition of those goods, there may be differences in how that VAT should be accounted for.
Import VAT is payable upfront at the point of entry, in addition to any customs duty. Businesses which are entitled to recover this import VAT will need to wait until they file their period VAT return to seek a reclaim. This may take a number of months to recover and may cause cash flow issues for businesses, particularly SMEs. This is currently the case in the UK and Ireland for imports from countries outside the EU.
However, HMRC has published guidance recently where it states that it plans to operate the postponed system of accounting for VAT which currently applies in the UK (and Ireland) to the intra-community acquisition of goods from the EU, in the event that the UK falls outside the EU VAT regime. This means that UK businesses importing goods to the UK should be able to account for import VAT on their VAT return, rather than paying import VAT upfront on the arrival of goods into the UK. This is certainly welcome news as the postponed accounting should only be an administrative exercise for businesses that have full VAT recovery on those imports and not cause a cash flow issue. There are no proposals to introduce changes to the import VAT regime in Ireland in the event of a hard Brexit. Accordingly, businesses importing goods into Ireland from the UK will be required to account for import VAT upfront and may be required to wait some months before receiving a reclaim.
2. Customs Duty
Should the UK leave the EU without a withdrawal agreement (or failing to agree a free trade agreement (“FTA”) during a transition period), it will need to impose WTO-approved tariffs on the imports of goods into the UK. It is anticipated that initially, the UK would just emulate the exiting EU common tariff and apply that to imports into the UK. This might at least give businesses transporting goods to the UK an indication of the customs duties that would apply to their products.
Customs duty is normally calculated as a percentage of the value or per unit of quantity or weight of the goods being imported. The percentage varies depending on the type of goods and the country of origin. Unlike VAT, a trader will not have any potential to recover customs duty and it will therefore be a real cost for businesses.
Unlike VAT and customs duty which are subject to common EU rules, other taxes (ie taxes on income, profits and gains) are for the most part governed by the domestic law of Member States and are less likely to be directly affected by Brexit. However, there are several treaties which provide beneficial treatment for persons who are EU residents. Some domestic Irish legislation also provides that particular treatment only applies to EU residents. We have highlighted below some examples of issues that arise.
1. EU Directives
Many EU directives aid intra-EU trade and investment and are drafted in terms that simply refer to “Member States” without naming specific jurisdictions. Examples of EU directives which have been transcribed into domestic law include the Parent/Subsidiary Directive, the Mergers Directive and the Interest /Royalties Directive. Generally, the domestic provisions implementing these directives are drafted in terms that simply refer to “Member States” without naming specific countries. As a result, it is assumed that UK business will automatically cease to benefit from the special treatment offered by Ireland under these directives when it exits the EU.
2. Domestic Legislation
As noted above, much of Ireland’s tax legislation is drafted to provide relief to companies resident in either the EU, the EEA or a country with which Ireland has a tax treaty. Therefore, amendments may be required to legislation to maintain the status quo post Brexit.
For example, Irish legislation contains provisions relieving certain payments to 51% subsidiaries from withholding tax. This group relief applies where a company which is resident in a “relevant Member State” makes a payment (eg interest) to another qualifying group company resident in a relevant Member State. "Relevant Member State" for this purpose includes EU Member States and EEA States with whom a tax treaty has been agreed. If the UK leaves the EU/EEA, relief from withholding tax would no longer be available in respect of payments to UK resident companies under this provision. However, Ireland has other relieving provisions which could apply.
In order to be in a qualifying capital gains tax (“CGT”) group, all entities must be EU resident or resident in an EEA state which has a double tax agreement. Therefore, assuming that the UK does not get EEA status post Brexit, groups containing UK entities could have the effect of breaking the group for Irish CGT relief purposes. Consideration would then need to be given to any potential clawback of any previous CGT intra-group relief claimed on prior transactions as well as the impact on future transactions.
Stamp duty relief for reconstructions and amalgamations requires that the acquiring company be in the EU. In the absence of legislative amendments, this would not apply to the UK post-Brexit.
Proposed Legislative Amendments
As part of the Irish governments Brexit contingency planning, the Department of Finance has published a list of amendments that they wish to make to domestic legislation should there be a hard Brexit. In general this should ensure continuity in access to reliefs and exemptions (including the group payments relief and stamp duty relief outlined under the domestic legislation paragraph above) for corporate groups that contain UK entities by extending the relevant definitions from the EU/EEA to include the UK. This is a welcome development and brings a degree of certainty for those planning corporate transactions in 2019 and beyond.
Potential Benefits to Ireland
Ireland and the UK have historically been aligned on many of the tax proposals put forward at an EU level. While Ireland would lose a key ally in relation to issues such as the proposal for an EU-wide common consolidated tax base, Brexit should present opportunities for Ireland, in particular in respect of foreign direct investment. Much of Ireland’s tax system is likely to remain unaffected by Brexit and therefore there is a degree of certainty for businesses looking to invest in Ireland and benefit from its EU membership. It is worth highlighting that Ireland’s tax law has been drafted to avoid fiscal obstacles to trade (eg withholding taxes) where the overseas party is either a member of the EU or, like the UK, has a double tax treaty with Ireland. Therefore, many of the exemptions from withholding tax should still apply when the UK leaves the EU by reason of Ireland continuing to have a double tax treaty with the UK.