Tax implications of Brexit from 1 January 2021

12. January 2021
  • Adam Pinďák
  • Zuzana Kalincová

In this article, we would like to inform you that the so-called transition period introduced on the basis of the Withdrawal Agreement between the United Kingdom and the European Union lasting from 1 February 2020, during which EU law continued to be temporally applied in mutual relations between the UK and the EU, ended as of 31 December 2020. As this period has expired, the United Kingdom has become a third country from the perspective of tax and customs regulations and the rules of the single internal market and the customs union will no longer apply to it.

After several months of negotiations, a Trade and Cooperation Agreement, which will govern the future mutual economic relations between the United Kingdom and the European Union, was signed on 30 December 2020. Below we bring you a brief summary of the main tax and related implications of the withdrawal of United Kingdom from the European Union from 1 January 2021.

Value added tax

From the perspective of the value added tax, the United Kingdom will no longer be part of the common VAT system and will not be subject to the EU rules that harmonise this tax. In relation to the EU member states, the United Kingdom will newly be considered a so-called third country.

The application of value added tax in trade with goods between the United Kingdom and the EU member states will represent the greatest change. The current rules for supplying goods to another member state and buying goods from another member state will be replaced with rules for import of goods from and export to third countries. Buying goods from the United Kingdom will therefore newly be viewed as import from a third country. Supplying goods to the United Kingdom will be exempted from tax as export into a third country if statutory conditions are met. In compliance with the transitional stipulations, however, in case a correction of the tax base for supply or purchase of goods is carried out before the transitional period had ended, the rules applicable hitherto will apply. The same will apply in case of dispatching or transport of goods terminated after 1 January 2021, if the transporter proves that it began before the transition period has ended.

After the transition period has ended, it will no longer be possible to apply some special regimes applicable only in trade with EU member states, such as for example sending of goods, a simplified procedure for goods supply within the EU by means of triangular transactions, supply and purchase of goods using relocation of goods in the warehouse regime within the European Union, supply and purchase of new means of transport within the territory of the European Union or the special regime for traders with used goods, collector’s items and antiques.

Providers of services according to article 10i paragraph 1 of the VAT act established in the Czech Republic can no longer use the special regime of a single administrative location, the so-called Mini-One Stop Shop (MOSS), for submitting the VAT declaration and paying potential VAT due in the United Kingdom. They will need to comply with rules applicable in the United Kingdom.

There have also been extensive changes in the rules for tax return. It will only be possible to apply the current regime for return of tax from other member states for the period before 1 January 2021 at the latest, and such a request must be submitted by 31 March 2021 at the latest. After the transition period has ended, the regime for return of tax to foreign entities liable to tax will apply in relation to the United Kingdom.

The above does not apply to Northern Ireland. Within trade with goods, Northern Ireland has (for a minimum of four years after the transition period has ended) the position of an EU member state. A change of VAT number occurs, though, where Northern Ireland will newly be using the “XI” prefix for trade with goods within the EU. However, the exception for Northern Ireland does not apply to the provision of services, where it is considered a third country, not an EU member state, as is the case with transactions that involve goods. The current rules for return of taxes from other member states will also continue to apply.

Customs regulations and free movement of goods

As the transition period has expired, the United Kingdom ceases to be part of the customs union and will no longer be subject to the common Union Customs Code, but to its national customs regulations. The United Kingdom will thus have the power to one-sidedly decide the customs duty in relation to other countries, unless trade agreements with the individual countries stipulates otherwise.

According to the signed agreement, no customs duties or other obstacles will be applied in mutual trade with the EU countries. Entities will only be able to use these advantages if they meet the conditions of proving the origin of goods and meeting the technical standards required on the territory of both contractual parties. In case of transfer of goods across the borders of the contractual parties, it will also be necessary to meet declaratory and other formal customs obligations.    

Social security of migrant workers and free movement of persons

As the transition period has expired, the current regime of free movement of persons between the United Kingdom and the European Union has ended and for longer stays above 90 days, visa or other permits will newly be required.

In connection with the signed trade agreement, new social security rules for cross-border workers migrating between EU member states and the United Kingdom have been implemented as of 1 January 2021. Within one month since the trade agreement has taken effect, every EU member state will be able to choose, if the newly implemented detached worker rules regime will apply in its relations with the United Kingdom. It corresponds to the current rules of social security when seconding workers to another member state, and even in the new regime, such a person can continue to participate in the social security system in its home country, if the period of secondment does not exceed 24 months. In case the given country does not choose this regime, persons seconded from 1 January 2021 will be obliged to pay social security in the country, where they perform economic activity. For workers seconded before this date, the current rules for secondment of staff to another member state will continue to apply, however.

Taxation of profit sharing, interests and royalties

From the perspective of taxation of legal entities, the end of the transition period will mainly have a significant impact on harmonised areas of direct taxes, which include for example the system of taxation of profit sharing, interests and royalties. This income going from sources on the territory of the Czech Republic to the United Kingdom, on the other hand, will no longer be exempt from the withholding tax and will mainly be governed by the respective double taxation treaty.

In compliance with the Czech-British double taxation treaty, payment of profit sharing will be subject to 15 % tax, or 5 % if the recipient is a company, which owns a minimum of 25% of voting shares. Royalties, depending on their category, will either be taxed with a 10% rate in the source country or they will only be subject to taxation in the country of the recipient of royalties. Interests, on the other hand, will always only be taxed in the country of the recipient of the interests, who is their beneficial owner.

In case you are interested in an analysis of the impact the newly implemented rules between the European Union and the United Kingdom on any area of your activity, please, do not hesitate to turn to us.

Author: Adam Pinďák, Zuzana Kalincová