UK leaving the EU – it is time to readjust the sails

Although Britain’s vote last Thursday in favor of leaving the European Union does not cause any immediate changes and the referendum is not legally binding, the implications of leaving the EU may result in fundamental changes and new challenges for many businesses across Europe.

What might happen next?

It is expected that the British government will treat the referendum as final and will invoke Article 50 of the Lisbon Treaty to initiate the negotiation process with the European Council for an agreement on the terms of leaving the EU. It will likely take two years from formal notification of intention to withdraw until the UK effectively secedes from the EU. Austrian companies should nevertheless already at this stage start reviewing their supply chain activities and long-term contracts with business partners in the UK and analyzing very carefully potential risks and opportunities covering economy, trade, business strategy, talent, tax, legal and regulatory developments.

Third-country territory after secession.

Post exit, the UK will no longer be part of the common market from a VAT and customs perspective. That is likely to mean that UK legislation will need to replace EU Directives, Regulations and Council Decisions that currently govern customs and indirect taxes. From that moment, community legislation relevant for third countries must be applied to the movement of goods and services between the UK and the EU. As a result, trade between the UK and EU Member States will no longer involve intra-community dispatches and acquisitions, with the corresponding reporting obligations but will become exports and imports to be accounted for and evidenced as such.

Trade tariffs.

Depending on the outcome of the secession negotiations and subject to the conclusion of preferential trade agreements, third country customs duties will be payable in addition to import VAT, when goods are moved between the UK und the EU Member States. Together with the related import and export formalities, this may result in trading impediments. In contrast to import VAT, customs duties are not deductible and therefore must be accounted for in future price negotiations and contractual agreements with customers in the UK.

Entrepreneurial status.

For services provided to UK companies, proof of business status can no longer be established on the basis of a VAT registration number assigned to the customer. Therefore, a certificate of entrepreneurial status or alternative evidence of business status will be required.

VAT refund applications.

Businesses seeking VAT refunds from EU Member States will need to use the 13th Directive VAT refund process rather than the electronic intra-EU refund scheme, with the consequence that the refund application period decreases from currently nine to six months following the year of supply.

Actions to be taken.

Impending changes in particular in relation to the movement of goods and services may require considerable resources and complex planning to implement appropriate changes within the ERP-systems, monitoring and compliance processes currently used by businesses to account for VAT. For example, tax codes and master data may need to be thoroughly reviewed/updated and compliance procedures or automated tools used in the tax return preparation process may need to be amended. Contracts may require renegotiations and purchase and sales strategies may need to be reevaluated in view of any prospective additional duty burdens in the event of reintroduction of trade tariffs.

What lies ahead for many organizations is still unclear and depends on the actions and decisions the UK will take. There has been yet no indication from the UK government of any arrangement they will seek in relation to the EU. Therefore, businesses must be prepared for a number of different scenarios, identify specific areas that may be materially affected depending on the path the UK government may take and get ready to take actions, where key opportunities are clear or immediate risks need mitigation.

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Eduard Kurz

Eduard Kurz

Senior | Deloitte Tax | Telefon: +43 1 537 00 7456 | E-Mail senden

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