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This article was first published in the April 2018 UK edition of Accounting and Business magazine.

EU member states broadly control their own corporate tax rates, but Britain’s exit from the EU will create a host of new tax issues for the many companies that will continue to trade with the bloc.

As you may expect, the tax implications for UK companies will vary widely from company to company, but the issues are sufficiently complicated for businesses to need to start planning as soon as possible to avoid problems or poor outcomes. So what steps do tax experts recommend? The first decision with tax implications that many companies will have to take is whether to stay exclusively in the UK or set up a foreign subsidiary or branch. While the final outcome of talks is unclear, most experts agree that businesses should plan on a future without any commercial ‘passport’ to operate across the EU.

Bill Dodwell, the partner leading Deloitte’s tax policy group in the UK, says: ‘Setting up an EU subsidiary may make sense for companies not just in financial services but in other sectors too if they are to retain full market access.’ For more detail on setting up an EU bridgehead, see page 22 of last month’s Accounting and Business.

The most crucial early choice will be when to do this. Companies that wait until after the UK exits the EU could face an unexpected tax bill. This is because setting up a foreign subsidiary, which will often take over profitable contracts from the UK head office, could involve effectively transferring a valuable asset. At present, such a transfer can typically be made without triggering a tax liability under the EU mergers directive, but this will cease to apply when the UK-EU divorce comes into effect.

The cut-off point may be delayed beyond March 2019 (the end of the two-year negotiating period designated by Article 50 of the Lisbon Treaty) if the UK agrees a transitional deal (see also page 62). The UK government and European Commission are aware of this potential problem for importers and are likely to find solutions for the issue. However, negotiations are ongoing, so it is still possible that EU importers of UK goods will face this VAT cash drain. Experts say UK companies shouldn’t bank on any particular outcome but be prepared for all. Dodwell advises: ‘Companies that are thinking of moving some operations to EU nations should aim to do so by the first quarter of 2019 or the final quarter of 2018.’

Then there is the issue of transferring staff. EU regulations ensure that companies and individuals have to pay tax contributions only in the home country of the employee, with payments made in the nation where the individual is most likely to retire (and therefore draw benefits). If no UK-EU deal is struck on this issue, companies and individuals could end up having to pay employee taxes in two or more countries. ‘Social security contributions could prove a major headache,’ says Robin Bailey, global mobility senior manager at Mazars. ‘For example, in France the combined social security contributions of employer and employee reach 50%.’ Bailey says that such complexities could cause particular problems for smaller companies, which are not always aware of the rules. ‘This is a situation that could easily end up in litigation if staff sent abroad feel they have not been fully informed about any increase in their personal liability,’ he says.

Mates rates

UK companies looking to set up an EU office may not always have the luxury of shopping around for the lowest corporate income tax rate. But it is a consideration they should factor into their decision-making. The new subsidiary is likely to generate profits taxed at a different rate from in the UK.

Corporate income tax is levied at a wide range of rates across the EU, from 30% in Germany to 12.5% in Ireland and Cyprus (by comparison, the UK corporate tax rate is 19%, and the global average around 22.5%, not weighted to GDP). Renata Ardous, director of international tax and transfer pricing at Mazars, says: ‘It makes sense for companies to do some pretty thorough homework on these different tax systems before settling on a location. It makes sense to seek advice, as effective rates can differ from headline rates.’

A key element in achieving tax efficiency is to identify the right adviser in the new EU host country. This could be an unwelcome extra burden for smaller enterprises. ‘One of our recent surveys showed that 77% of smaller firms rely on specialist advisers when it comes to taxation, and businesses that end up operating in several jurisdictions are likely to need even more support,’ says Sonali Parekh, head of policy at the Federation of Small Businesses.

Another complication for companies unaccustomed to dealing with foreign subsidiaries is transfer pricing – the set of rules to ensure that companies can’t game the tax system by selling goods or services within their group at a non-market rate. For example, a UK company would not be allowed to reduce profits at its highly taxed French subsidiary by overcharging for goods or services provided by head office. ‘This system can be a challenge for novice companies, and it is one of the most common challenges raised by tax authorities,’ says Dodwell.

Tariff terms

Even companies that decide never to depart from British shores cannot afford to ignore tax. The first possible implication for UK companies trading with the EU will be customs duties. There is a wide range of potential outcomes of the Brexit talks on trade – from continued membership of the single market, or a low/zero-tariff trade deal, to no deal. In the last case, the UK would revert to World Trade Organisation (WTO) rules with the EU. This might seem a trivial matter, since the average tariff on goods entering the EU is only around 2%. But that is misleading, according to Dodwell. ‘The tariff on cars is 10%, and for meat it can range from 30% to 40%,’ he says. ‘Effectively the average is useless, so companies need to start understanding this to plan for a worst-case scenario.’

Companies can seek advice on this issue from a variety of sources, including their logistics providers, which often have arms that assist clients with the bureaucratic aspects of trade. ‘The key is not to be caught off-guard by changes that could affect prices,’ Dodwell says.

Some smaller companies may need to start preparing for a fully domestic future, warns Parekh. ‘A quarter of our members said they would be genuinely deterred from trading with the EU single market if tariffs were imposed at any level,’ she says. ‘Such companies will also need to start planning now.’

A related ‘known unknown’ is the outcome of talks on VAT. For companies importing goods from the US or any other non-EU member, VAT must be paid in the month after the items are received. While the VAT can be reclaimed the next time the company submits its tax returns – often quarterly – this can create a cashflow problem until the money is returned.

Under EU rules, there is no such inconvenience, as goods travelling between member nations do not trigger VAT obligations. ‘The UK government is aware of this potential problem for importers and is likely to avert it by giving companies more time to pay,’ says Dodwell. ‘However, the UK government cannot control EU policy, and it is quite possible that EU importers of UK goods will face this VAT cash drain.’

The key for UK companies here is to be prepared and sensitive to this potential problem for customers in the EU. Solutions could include deferred payment, although this would create a cashflow issue for the UK company.

Brexit could trigger a range of tax challenges for UK companies, especially those that open EU subsidiaries for the first time. They will need to navigate two tax regimes instead of one and have to stay on top of transfer pricing. Even those companies that merely trade in EU states should start planning for various scenarios on duties and VAT that could affect their operations.

Dijana Suljovic, journalist