While the negotiations between the European Union (EU) and the United Kingdom (UK) early December 2020 seemed to have stranded and a hard Brexit seemed to be inevitable, both the EU and the UK surprisingly announced on Christmas eve (24 December 2020) that a Brexit-deal was closed. This means that a hard Brexit has been averted. But has it?
In this tax alert we inform you about several consequences from an EU perspective of the Brexit deal in the field of Dutch value added tax, corporate income tax and customs.
In short, after many years of lengthy political struggles and harsh negotiations between the EU and the UK, the Brexit became official on 31 January 2020. In order to ensure an uncluttered exit of the UK from the EU, both parties concluded a transitional agreement on basis whereof the UK was treated up till 31 December 2020 as if it (still) was a member state of the EU. After 31 December 2020 all EU laws are no longer effective within the UK. On 24 December 2020 the EU and UK closed the Brexit-deal in order to avoid a hard Brexit.
The Dutch government has officially ratified the Brexit-deal on 30 December 2020 and the agreement or ‘partnership’ between the EU and the UK will enter into force on 1 January 2021.1
Value added tax
The end of the transitional period includes a significant change for value added tax (VAT) purposes, since within EU member states harmonized EU VAT laws and regulations apply, which are implemented in their national legislation. The UK does no longer qualify as an EU member state for EU VAT purposes. This does have a significant impact on suppliers (taxable person for VAT) doing business in the UK and vice versa.
From 1 January 2021 the intra-community supply of goods rules do not apply on the transfer of goods between the EU to the UK (exempt or 0%-tariff). Instead the transfer of goods from the EU to the UK qualifies as export (0%) and the transfer of goods from the UK to the EU as import (0%/9%/21%). In principle on the import of goods in the EU, the VAT is immediately due, unless an entrepreneur has applied for the so-called article 23 permit.
EU service providers doing business in the UK with other entrepreneurs (bussiness-2-bussiness) do not charge EU VAT on their invoices. This is different if the recipient is a non-VAT entrepreneur but a regular consumer (business-2-customer). Please note that certain exceptions apply to the aforesaid main rules. Furthermore, the EU Sales Listing (ICP declaration) is also no longer applicable from 1 January 2021 to the supply of goods and services to the UK.
Furthermore, the Brexit has among others the following consequences for VAT purposes from 1 January 2021 between the UK and the EU;
Corporate income tax
From 1 January 2021 EU laws, directives and regulations e.g. the Parent – Subsidiary Directive 2011/96/EU or the Interest and Royalties Directive 2003/49/EC and European Court of Justice case law are not effective in the UK. Now that EU laws are not applicable anymore, taxpayers could rely on the tax treaty for the avoidance of double taxation between the Netherlands and the United Kingdom.
Also, some specific Dutch rules which are more beneficial for other EU Member States than for third countries may no longer apply, for instance relating to the Dutch fiscal unity or to legal mergers and demergers.
From 1 January 2021, the UK is no longer part of the EU internal market and therefore goods or persons cannot move freely to and from the UK. The UK will be treated as a third country, forming a free trade zone with the EU, meaning that goods that are transported from the EU to the UK have to be exported and vice versa. This will trigger adverse administrative burdens for enterprises doing business in the UK and vice versa e.g. import/export declarations should be submitted with the local customs authorities, commodities certificates should be available (e.g. statement on origin or certificates in relation to plants or medical devices), increasing of costs on the transport of goods and cash flow disadvantages.
In the Brexit-deal the EU and UK agree – under certain circumstances – not to apply any custom duties; an exemption also known as 0%-tariff on goods imported and/or exported between the EU and the UK. This 0%-tariff may be applied if the supplier of goods is able to prove that the goods have their preferential origin in the EU (if exporting from the EU to the UK) or in the UK (if exporting from the UK to the EU). The definition of origin means that in principle the goods have to be made or grown in the EU or UK.
The ‘new’ customs formalities between the EU and the UK apply from 1 January 2021 and no deferral is granted. This could mean that if an entrepreneur is not in possession of the correct custom documents as from 1 January 2021, the goods may not enter the UK or the EU.
Practical guide exporting to the UK
An EU exporter of goods to the UK should assess whether UK customs duties are normally due on the goods that are being transported, this could for instance be verified with the UK recipient, UK counsel or on the website of the UK government. Provided that the UK levies customs duties, the EU enterprise exporting the goods to the UK has to include a reference on the invoice or other document that the goods transported have their origin in the EU and is also accountable for this declaration (statement on origin). The exporter should also be able to prove that the goods have their origin in the EU.
Furthermore, if goods are transported to the UK with a value of more that EUR 6,000, the so-called Dutch REX number should be provided (in the invoice) to the UK recipient.
An EU exporter is not obliged to include a statement on origin in the case the UK does not levy customs duties on the goods that are exported to the UK, the exporter uses their Exporters Knowledge or the preferential origin could not be substantiated or proved. With respect to the latter UK customs duties may be due.
Practical guide importing from the UK
A UK exporter of goods to the EU should assess whether the EU customs duties are normally due on the goods that are being imported in the EU. This could be verified by the UK exporter of goods with the EU recipient, EU counsel or on the website of the European Commission. Provided that the EU levies customs duties, the UK exporting the goods to the EU has to include a reference on the invoice or other document that the goods transported have their origin in the UK and is also accountable for this declaration (statement on origin). The exporter should also be able to prove that the goods have their origin in the UK.
Furthermore, if goods are transported to the EU with a value of more that EUR 6,000, the British EORI number should be provided (in the invoice) to the EU recipient.
A UK entrepreneur is not obliged to include a statement on origin in the case the EU does not levy customs duties on the goods that are exported to the EU, the exporter uses their Exporters Knowledge or the preferential origin could not be substantiated or proved. With respect to the latter EU customs duties may be due.
For EU recipient of goods, it is advised to keep record of any invoices received from UK suppliers after 1 January 2021 for at least 7 years2 in order to prove that the goods are imported with application of the 0%-tariff.
Certain roll-over facilities apply to goods transported and invoice received prior to / after the Brexit date of 1 January 2021 in order to meet the customs formalities.
An enterprise should keep in mind when engaged in an a-b-c transactions of goods from a third country e.g. Asia or America, goods are imported in the EU and (re-)exported to the UK, that EU and/or UK customs duties are in principle due, if levied. In order to avoid adverse customs consequences in regard to these types of transactions, it could be preferred to include the goods under an EU customs procedure (e.g. customs warehouse or re-export).
A special but rather complicated position has been granted in the Brexit-deal to Northern-Ireland. From 1 January 2021 Northern-Ireland applies a dual system, wherein in certain situations EU or UK laws apply. For instance, Ireland and Northern-Ireland apply for EU customs and value added tax laws on trade between them, while UK laws apply on the import of goods in Northern-Ireland from third counties, unless the goods will be (re-)exported to the EU.
The Brexit-deal did relieve certain tedious consequences of a hard-Brexit in the field of trade and customs, however, overall the Brexit and the Brexit-deal mostly have adverse tax consequences for both the EU and UK. The EU member states anticipated a hard-Brexit and took measures in order to relieve EU entrepreneurs to the extent possible extent from adverse consequences of the Brexit. Nevertheless, the Brexit-deal is a small relief for the EU and the UK. In brief the Brexit was more or less a, hope for the best and prepare for the worst scenario.
1 The EU Parliament formally still has to sign the Brexit-deal, however, the Brexit-deal will (retroactively) enter into force on 1 January 2021.
2 Please note that for Dutch VAT purposes an entrepreneur is obliged to keep a record of its invoices for at least 9 years.
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