On 6.9.2019, the UK’s lower house of Parliament passed a law aimed at preventing a no-deal Brexit on 31.10.2019. Under this Act, if the Prime Minister has not secured an agreement with the EU by 19.10.2019 then he must request a delay to Brexit until 31.1.2020. As it is currently not foreseeable what such an agreement would look like, in particular as regards the EU border between Ireland and Northern Ireland, – and as the Prime Minister is insisting that he will refuse to seek an extension to the Brexit deadline despite the UK Act – no-deal still constitutes the worst case. In the following section we present the most important consequences that could result in the case of a no-deal Brexit and, to a large extent, in all other forms of Brexit, too.
If the UK becomes a third country ...
The UK will leave the EU on 31.10.2019, or at the very latest on 31.1.2020. The UK is comprised of England, Northern Ireland, Scotland and Wales. In the worst case, the UK would not be part of the European Economic Area (EEA, of which Norway, Iceland and Liechtenstein are also members in addition to the EU countries) and would then also not have any bilateral treaties and preferential agreements with the EU, like Switzerland, for example. In such a worst case scenario there would be no so-called backstop – this is an agreement under which, temporarily, until a free trade agreement has been negotiated, the UK would still remain in a customs union with the EU and, in addition, Northern Ireland would also stay in the European single market in order to avoid checks along the border between Ireland and Northern Ireland.
From the perspective of Germany, Ireland and the other EU members, after Brexit the UK would become a third country. World Trade Organisation (WTO) rules would apply to customs and trade where appropriate.
... the following hot issues will arise
When Brexit happens, regardless of whether or not there is an agreement, companies will have to give their attention to the following topics in particular:
- movement of goods and customs,
- supply chains,
- access to markets,
- accounting & reporting,
- currency & treasury,
- law & contracts,
- personnel and
- transactions & restructuring.
In the following section, we take a closer look at some aspects that, in the worst case, could very quickly become hot issues for many companies.
Adjustment of processes/IT/CMS
Companies will have to adapt their internal processes to take account of the UK’s new status. This will apply especially to the following points:
- Adjustments to master data (e.g. control indicators)
- Changes to the ERP system
- Information/texts shown on invoices (VAT number, references to VAT rules)
- Review of Incoterms – who is doing the importing?
- Information and staff training
- The General Data Protection Regulation (GDPR) would no longer be applicable.
The impact on the movement of goods and on customs
As the UK will no longer be part of the EU Customs Union the checks at the border will have to be stabilised. Border checks at the port cities of Dover (England) and Calais (France) would be particularly critical. According to information provided by the French port, more than 40 million tonnes of goods and two million lorries cross the Strait of Dover every year.
In the worst case, if there is no customs union, goods from the UK going to the EU, and vice versa, would have to complete customs import and export formalities. Having an external EU border at the port of Calais would mean that every container and each lorry from and to the UK would require customs documents. There is a risk of checks, supply shortages and long queues.
The German Central Customs Authority has set up, among other things, “Brexit pools” in order to be able to respond sufficiently flexibly to the quantitative and localised impacts of Brexit. To this end, for all of Germany eight regions have been established where the main customs offices will use the ATLAS IT system – the customs administration’s automated clearance system – to provide each other with mutual support in clearance procedures. However, the challenges that Brexit poses cannot be met by the customs administration alone. Businesses that are affected will likewise have to prepare themselves for Brexit, too.
Customs declarations that are required for cross-border goods traffic will have to be monitored with respect to all prohibitions and restrictions as well as export controls, in particular in terms of:
- labelling requirements as well as the provision of approval documents and accompanying documents (e.g. export licences, pharmaceutical licences, ...),
- rules for the forwarding agent (international driving licence, other permit),
- the problem that goods with UK originating materials could lose their EU originating status,
- review of authorisations and with respect to
- potential trade restrictions.
In the case of deliveries to the UK, in the future, the necessary customs declaration will have to be submitted via the ATLAS (automated tariff and local customs clearance) IT system.
Changes to VAT on the delivery of goods ...
EU VAT legislation (EU Directive on the VAT system and ECJ case law) will potentially no longer be applicable in the UK. There will not be many substantive changes in the case of B2B goods deliveries. Tax-exempt intra-Community (IC) deliveries will become tax-exempt exports to the UK, while IC purchases will become imports into the EU. Nevertheless, there will be a considerable increase in the effort and costs needed for clearance and documentation. The UK is currently working on rules that, under certain circumstances, would simplify import clearance; developments here should be monitored and, where appropriate, the terms of delivery should be adjusted.
Specifically, you should pay attention to the following.
Chain transactions – In the case of transactions with an intermediary in the EU and an end buyer in the UK you need to take account of a particularity, namely, that exporters liable to VAT may differ from those deemed to be exporters for customs purposes. In the view of the German customs administration, the exporter for customs purposes is always the EU intermediary even if, for VAT purposes, the movement of goods for the delivery of the German business has to be attributed to the EU intermediary.
Transporting to warehouses – Transporting to the UK as a third country will always constitute an export with the subsequent supply being taxable under UK law. A tax-exempt supply to the (end) buyer would no longer be feasible.
Changes for B2C – Currently, mail-order deliveries to the UK up to a limit of GBP 70,000 can be taxed in Germany. It is only once this threshold of sales has been breached that the place of supply shifts to the UK (Section 3c of the German VAT Act (Umsatzsteuergesetz, UStG)). In the event of Brexit this simplification will cease to apply. The German mail-order company would then make a tax-exempt export delivery. Instead, British import sales tax (IST) would potentially arise on an import into the UK because the place of supply would have shifted to the UK. For suppliers this would imply a change to a process and would involve considerable additional costs as a result of having to submit customs declarations, having to register in the UK and pay IST and UK VAT. German VAT will continue to apply if the buyer provides the transport – however, under certain circumstances, a German supplier will not wish to inflict the obligations associated with this on to its British customer.
Checking paperwork – Documents generally used as proof should be checked with respect to the wording and clauses that have been used, in particular, as to whether or not they can be kept as proof of export. For example, German suppliers that use a forwarding agent’s certificate as proof of a tax-exempt delivery should ensure that the export case is covered.
Input tax – As regards refunds of British VAT, refund applications in respect of the UK should be filed via the electronic portal at the German Federal Central Tax Office (Bundeszentralamt für Steuern, BZSt) up to the exit date.
... and on the supply of services
(1) In the case of B2B services, the place of supply will also generally still be the place where the recipient is domiciled (Section 3a(2) UStG). Up to now, it has remained open as to whether the recipient would be liable for VAT under UK law, or whether the supplying German business entity would have to register in the UK and invoice at the local VAT rate. The mandatory application of the reverse charge mechanism under the EU Directive on the VAT system would however no longer apply. Moreover, British VATINs and the proof of commercial status that they provide would likewise no longer apply. In the future, German business entities would have to check the commercial status in another way (e.g. via the registration as a business entity liable to pay VAT) if they wished to avoid the risk of taxation in Germany.
(2) In the case of B2C services, the place of supply will generally remain the place where the supplying business entity is domiciled (Section 3a(1) UStG), even if the UK becomes a third country. In the case of certain services (data processing, supplying information, consulting, etc.) the place of supply would be the domicile of the private individual (Section 3a(4) UStG) because the UK will have become a third country.
Please note: It should be noted that the MOSS scheme (Mini One Stop Shop) for services supplied electronically to private individuals in the UK will no longer be applicable. MOSS is a simplification procedure under which VAT no longer has to be paid in each individual EU country but instead centrally, on a quarterly basis, to the German Federal Central Tax Office (BZSt). The MOSS scheme would have been applicable to mail order as well from 2021.
Implications for tax on earnings
Important EU directives, such as the Parent-Subsidiary Directive, Interest-Royalties Directive, Merger Directive and the ATAD (Anti Tax Avoidance Directive) would no longer be in force in the UK after Brexit. If no other arrangements are made then matters relating to tax on earnings between business entities in the UK and Germany will be regulated through the double taxation agreements (DTA) between the UK and Germany.
In the event of Brexit, the dividends paid by a German business entity to a UK company (in the absence of the Parent-Subsidiary Directive) would be subject to a withholding tax reduction to 5% (Art. 10(2)a) of the UK DTA with Germany).
By contrast, if a domestic (German) parent company received dividends from a UK subsidiary then, under the UK DTA with Germany, the UK could withhold tax of 5%. Based on the current legal status, the UK does not impose any withholding tax on dividends.
Brexit will not affect the taxation of interest and royalties because the DTA does not provide for any withholding tax on interest and royalty payments (Art. 11(1) and Art. 12(1) of the UK DTA with Germany).
Under the German External Tax Relations Act (Außensteuerrecht, AStG) it would no longer be possible to provide proof of assets or evidence of actual commercial activity in order to avoid taxation of CFC income despite passive income pursuant to Section 8(2) AStG. Therefore, in the case of passive income, the taxation of CFC income will be of greater relevance.