The end of the Brexit transition period on 31 December 2020 is the final step of the UK’s separation from the European Union (EU) and the beginning of a new relationship with the UK’s largest trading partner. With or without a EU trade deal in place by the end of the year, the UK Government has already confirmed that it no longer wants to participate in the EU single market and Customs Union regime, which will ultimately make the EU market less accessible for UK-based businesses and could risk the status of the UK as a European trading hub for global companies.
New UK border operating model good news for EU traders
The UK Government recently published the new border operating model, which provides a detailed approach of how the UK customs border will operate for goods that flow into the UK from 1 January 2021. Although significant questions remain, the publication of the Border Operating Model has been welcomed by the business community, especially from the EU, as it provides clarity around how imports of goods into the UK will be managed from next year.
The Border Operating Model provides that the UK is taking a flexible and phased approach in the first six months so that businesses importing into the UK can get used to the new rules. The new regime also allows overseas traders to import, or export, to and from the UK without the requirement of being established in the UK. Only a UK VAT and EORI number are necessary for EU traders to allow for a continued flow of goods to the UK.
UK traders hit with EU border cost shock
In contrast, the EU operates a long-established customs border model for all non-EU countries, which is governed by the Union Customs Code. This Code provides that only businesses who are established in the EU can import, or export, goods to or from the EU. Businesses who are not established in the EU are required to appoint an EU-based representative, who declares the import or export to the EU customs authorities on their behalf. These ‘indirect representatives’ are personally liable to pay any duties and taxes due upon an import transaction to the customs authorities. Due to the risk exposure, the number of available ‘indirect representatives’ in the EU are limited and their appointment is usually expensive. UK traders that don’t have an EU establishment will need to act before the end of the year and appoint an ‘indirect representative’ to declare their EU imports or exports or set up an establishment in the EU, which will come as a cost shock to many.
The UCC defines an ‘EU establishment’ as a permanent place of business in the EU that maintains human and technical resources to carry on a business in the EU. The reason why the UCC requires overseas traders to maintain an EU establishment is to protect EU duties and tax receipts as any amounts due to EU authorities can be collected or chased for directly from the EU establishment rather than from an overseas location of the trader. Once an EU presence has been setup the UK business can then also apply for an EU EORI reference and a local VAT number and will be prepared for importing goods to, or exporting goods from, the EU. It should also be noted that maintaining a business establishment in the EU could result in a requirement to register a branch in an EU country and to file company branch accounts on an annual basis as well as filing local corporation tax returns. As an alternative, a UK business can also incorporate a local EU subsidiary, which, once established, would have access to all EU trade freedoms, including the ability to declare imports and exports. UK businesses should compare the costs attached to appointing an indirect representative, maintaining an EU establishment, or setting up an EU subsidiary to arrive at the right solution for their business.
Global supply chains at risk
International groups of companies from larger economies, like the United States or China, have been using the UK as their European trading hub for decades. These global groups usually operate through a UK-based subsidiary company, which so far had unrestricted access to the EU market due to the UK’s membership of the EU single market and customs union. These UK subsidiaries have enjoyed the freedom to buy and sell goods and services from other EU countries without restrictions, employ EU nationals in the UK and move capital across the EU. These EU trade freedoms will cease to be available for UK companies from 1 January 2021, which means that international groups will need to review their European supply chains as soon as possible to avoid any disruptions next year.
In most cases the incorporation of a subsidiary in an EU member state should provide an international group with the required access to the EU single market and Customs Union, and supply chains might then be rerouted through the new EU subsidiary. However, this will ultimately mean that the UK will become less attractive as a global trading hub, at least as far as trading with the EU is concerned. Given that the EU is by far the UK’s largest trading partner in goods, the impact will be significant.
The UK as an international holding company location
Despite the uncertainty created by the UK’s departure from the EU, the UK continues to be an attractive location for international holding companies due to a stable legal and political environment. The UK has an attractive international tax regime and maintains an extensive tax treaty network, which provides for the elimination of double taxation in most transactional scenarios.
The UK also has a comparatively low rate of Corporation Tax of 19% and exempts dividend distributions from Corporation Tax received from subsidiaries established in most countries. The UK also does not charge Capital Gains Tax on the disposal of trading subsidiaries and does not levy withholding taxes on profit distributions from the holding company to its overseas parent company or individual shareholders.
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This article is taken from the latest edition of our Brexit Insights newsletter, our summary of Brexit updates designed to ensure you have a better understanding of how the UK leaving the EU may affect you as a private individual, a business, or both. If you would like to receive future editions of this publication, please register on our insights page here.
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