Tax

What does the Trade Agreement say?

The FTA has relatively little to say from a tax perspective. The UK and the EU have committed to implementing the principles of good governance in the areas of taxation reflecting the OECD principles concerning fair tax competition, the global standards on tax transparency and exchange of information, and the OECD minimum standards against Base Erosion and Profit Shifting (BEPS).

This commitment is expanded upon in the accompanying Joint Political Declaration, which sets out the principles relevant to assess whether a tax regime is harmful. 

As widely expected, there is nothing in the FTA on withholding taxes (WHT) on
royalties, interest and dividends, i.e. there are no measures to replace the effects of the Interest and Royalties and Parent-Subsidiary Directives.

In relation to VAT, the UK and the EU have committed to cooperate to ensure compliance with VAT laws and to combat fraud. Specific provisions on the exchange of information etc. to facilitate this are laid out in the Protocol on
administrative cooperation and combating fraud in the field of VAT and on mutual assistance for the recovery of claims relating to taxes and duties.

The UK has already transposed existing EU VAT rules into law through hundreds of Statutory Instruments and made a number of VAT-related announcements including for the financial services and travel sectors. Fundamental changes are being implemented as expected, including that goods arriving into the UK from the EU (and vice versa) now attract import VAT.

See our Customs and trade facilitation and Rules of Origin alerts on the key customs duty considerations.

How does this compare to what was expected?

As expected, the tax provisions of the FTA are limited, with the principal changes (especially in relation to VAT) previously announced. It is still unclear how the level playing field provisions to limit divergence between EU and UK standards, which include State Aid and subsidy policy, will affect the UK’s future freedom to design tax policy, but it appears from the terms of the FTA that it will be relatively unfettered.

What are the actions for business?

Review the full extent of VAT changes including recovery, registrations, reporting and systems. Separate consideration should be given to the more complex arrangements applicable in respect of Northern Ireland.

Identify where the Interest and Royalties and Parent-Subsidiary Directives no longer apply to their operations and quantify the potential additional withholding tax payable. Where a zero rate of WHT applies under a bilateral treaty, there may be additional processes required to qualify for that zero rate.

Monitor developments in UK tax policy, including areas of potential divergence from that previously in force in accordance with agreements made at EU level, such as changes to Mandatory Disclosure Rules which will now align with lesser requirements of the OECD, and the introduction of new incentive and zonal arrangements such as the recently announced Freeports.  

To discuss specific support with your Brexit preparations based on this latest development contact: Deloitte Brexit Insights.