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BREXIT: Tax consequences of the UK’s withdrawal from the European Union

21 February 2020

In accordance with the agreement of 29 January 2020 on the United Kingdom's withdrawal, the United Kingdom has left the European Union since 1 February 2020.

The agreement between the EU and the United Kingdom aims to preserve all the effects of membership of the European Union on a transitional basis and to extend certain aspects during the post-transition period (Agreement 2019/C 384 I/01 of 12 November, 2019, OJEU C 384 I).

I - Until at least 31 December 2020: previous rules continue to apply

During the transition period, which in principle expires on 31 December 2020, but could be extended for one or two years, all European Union law continues to apply to the United Kingdom in relation to tax and in other areas (Art. 126 and 127 of the Agreement) and the United Kingdom continues to be treated as a Member State (Art. 7, paragraph 1, and Art. 127, paragraph 6).EU law therefore has the same legal effects with regard to the United Kingdom and its territory as it does within the EU and its Member States. This means that for application of the VAT Directive, for example, all rules, particularly those regarding territoriality for cross-border transactions between a European Union Member State and the United Kingdom, are the same as those applicable between two EU Member States.Similarly, the withholding tax exemptions provided for by the Parent-Subsidiary Directive and the Interest and Royalties Directive will continue to apply during the transition period, as will the neutrality of the restructuring operations covered by the Merger Directive.More subtly, the rules of EU law which are incorporated into Member States’ domestic law without resulting from European directives or regulations will also continue to apply. Article 127 (6) of the Withdrawal Agreement states: “Unless otherwise provided in this Agreement, during the transition period, any reference to Member States in the Union law applicable pursuant to paragraph 1, including as implemented and applied by Member States, shall be understood as including the United Kingdom.” It can be inferred from this that when domestic law transposes the requirement to respect the fundamental freedoms set out in the Treaty on the Functioning of the European Union, it must be considered as “implementing and applying” EU law.

Furthermore, during the transition period the provisions of the withdrawal agreement of 12 November 2019 replace the rules of domestic law adopted to deal with a “hard brexit” scenario. Finally, EU legislation which comes into force during the transition period should, in principle, be applied by the United Kingdom until the end of that period. For example, this includes the reporting obligations imposed from 1 July 2020 on intermediaries and certain taxpayers by Directive 2018/822 of 25 May 2018 (“DAC 6”). If the transition period were to be extended, it would also include the new VAT system applicable to e-commerce established by Directive 2017/2455 of 5 December 2017, which comes into force on 1 January 2021.In the event of breach of its obligations, the United Kingdom, like any Member State, will be subject to all the consequences of a potential violation of EU law.

II - Some rules are established for the period following the transition period

The agreement does not lay down any permanent tax rules for the period following the transition period, which must therefore be used by the European Union, and its Member States where applicable, to organise their future relations with the United Kingdom.However, it does establish certain rules that will apply on a temporary basis, in respect of situations which arose prior to the end of the transition period.In customs matters (Art. 47 to 49), as well as regarding VAT (Art. 51) and excise (Art. 52) issues, the agreement maintains the application of EU law for flows beginning before the end of the transition period.For the application of VAT, the following rules will apply:

  • the VAT Directive will apply to flows which began before the end of the transition period and for five years following it “with regard to the taxable person's rights and obligations in relation to transactions with a cross-border element between the United Kingdom and a Member State that took place before the end of the transition period”;
  • VAT reimbursement requests by a non-established taxable person shall be submitted until 31 March 2021 in the United Kingdom (for taxable person established in a Member State) and in each of the EU member states (for taxable person established in the UK) via the electronic procedure provided for in Directive 2008/9/EC;
  • and, finally, amendments to VAT returns that were submitted via the Mini One-Stop Shop before the end of the transition period shall be submitted at the latest on 31 December 2021.

Furthermore, administrative cooperation procedures between Member States and the United Kingdom will continue to apply from the first day following the end of the transition period for varying lengths of time: in customs matters, until completion of a previously initiated procedure (Art. 98); in relation to VAT, for four years (Art. 99) and for five years in respect to recovery of claims relating to taxes that became due before the end of the transition period (Art. 100).The United Kingdom will continue to have access to information systems in the relevant fields of EU law (Art. 50) for the purposes of operations initiated before the end of the transition period. The length of access varies depending on the database in question (Annex IV of the agreement).For example, the VIES database for VAT will be accessible until 31 December 2024 and will continue to be updated by the United Kingdom in the meantime.Finally, state aid procedures may be initiated by the European Commission against the United Kingdom for four years in respect of situations which arose before the end of the transition period. More generally, proceedings may be brought before the ECJ for any breaches committed by the United Kingdom before that date.

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Elisabeth Ashworth
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Daniel Gutmann