Brexit in focus:
the tax relationship between the United Kingdom and
the European Union in the light of the new agreement
After a long tug-of-war, on Christmas Eve, 24 December 2020, negotiations between the United Kingdom (UK) and the European Union (EU) on the former’s withdrawal from the EU were successfully concluded. Due to its late adoption, the agreement cannot be considered final as it still needs ratification, which is expected to take place on or around 28 February, but nevertheless the details of the agreement entered into force on 1 January 2021 (anyway, the parties themselves did not deny that changes were to be expected in the already effective rules). In this article, beyond the brief history of Brexit, we analyse only the most important tax aspects from the many other ones that can be considered (e.g. fishery, air traffic, investments, energy, etc.).
As a starting point, let’s briefly review the historical chronology of the UK’s exit from the EU (a process commonly known as “Brexit”) over the past 5 years, and with disregarding the description of the participant’s interests, furthermore the economic and social antecedents leading to the exit.
The prelude of Brexit in a nutshell
In the referendum on the exit on 23 June 2016, slightly more than half of the approx. 33.5 million UK voters (72% of the people entitled to vote appeared) voted in favour of leaving. Following the referendum, on 29 March 2017, the then Prime Minister, Lady Theresa May, announced to the European Council, in accordance with Article 50 of the Treaty on European Union (“Treaty of Lisbon”), her country’s intention to withdraw from the EU and the European Atomic Energy Community.
The agreement came into force on 1 February 2020, after months of debate in the British Parliament and approval by the Queen and the European Parliament. From that date, therefore, the UK formally (de jure) withdrew from the EU, no longer able to participate in its decision-making policy, but until the end of the calendar year 2020, a transitional period came into force, during which the previous trade, tax, and customs rules remained unchanged.
Towards the end of the period, it became more and more urgent (especially for the leaving country) to reach an agreement between the parties, in order to not realizing the so-called “Hard Brexit”. The agreement was concluded on 24 December 2020, as mentioned in the introduction, in such a hurry, that linguistic and legal proof-readers did not have time to read the published text of the agreement with professional eyes, so continuous clarifications and corrections are expected.
Description of the main tax rules of the agreement just adopted
On 1 January 2021, the UK withdrew also from the EU’s single market and customs union, as well as from the international agreements concluded by the EU. This means that, the free movement of people, goods, services and capital between the UK and the EU ended with this date.
Value added tax (VAT)
Since the UK has indeed been a third country in all respects since 1 January 2021, the companies concerned must, from a Hungarian point of view, handle – in their transactions with the country – import on the inbound and export on outbound side. Contrary to the current rules on EU purchases, the import customs procedure must therefore be carried out in any case, which may even raise cash-flow problems for some companies due to import VAT. In addition, customs duties may now appear in connection with this type of transaction, which will be described in more detail in the next subsection.
The rules of triangular transactions will not apply to the UK, the essence of which is that, if the conditions are met, the middle participant in the chain is exempted from paying and registering the tax in the final buyer’s country, as this simplification is conditional on all participants shall be tax resident within the EU. Hungarian taxpayers involved in this type of transaction must therefore apply for a VAT number in the UK, which also involves submitting VAT returns in accordance with the UK VAT rules. In the same way, of course, companies based in the UK may now be subject to Hungarian VAT registration.
It will also not be possible to apply the simplification for call-off stocks, according to which, unlike the general rules (EU sales and EU purchases), the taxable person supplying the product does not have to register itself in the Member State of destination. The condition of this legal institution is that the transaction shall take place between EU taxpayers.
The regulation of the VAT refund will also change: in case of transactions with a settlement date after 31 December 2020, the refund will not be made through the previous system. This is further complicated by the fact that no reciprocity agreement between Hungary and the UK has been adopted at this time. What is certain is that until 31 March 2021, a VAT refund request can still be made through the “old” system for transactions with a settlement date of calendar year 2020, and it is worthwhile for the companies concerned to make use of this.
A special solution has been adopted for Northern Ireland, due to the so-called Good Friday Convention adopted in 1998, which guarantees the free interoperability of the common border in Irish / Northern Irish relations with a tense historical past. Companies established in Northern Ireland will be given a new tax number, containing not “GB” but “XI”, and will continue to be subject to EU sales and purchases in respect of supplies of goods and purchases from there (the procedure under the old rules therefore does not cover services).
Customs
As mentioned, being a third country, the issue of customs also appears in economic relations. In addition to the administrative burden (CMR alone will no longer be enough for the tax exemption, as there is no EU sales or purchases between the parties) this can also lead systematic issues at certain companies, just think of recalibrating invoicing programs and other IT systems.
However, according to the agreement, a customs rate of 0% shall be applied to all commodities and there is no quantitative quota (except for, e.g. canned tuna or aluminium foil). However, the condition of both discounts is that the origin of the goods has to be proved.
As described above for VAT, Northern Ireland is in a special position also with regard to customs: the EU customs border is not between the Irish / Northern Irish border, but between the island of Ireland and the island of Great Britain. That means, that the territory of Northern Ireland, which politically belongs to the UK, similar to the VAT of EU sale and purchase of goods, remains under EU customs jurisdiction.
Fiscal representative
According to the Hungarian VAT rules, the appointment of a fiscal representative for the administration of Hungarian tax matters is possible for all taxpayers who are not established in Hungary for economic purposes, but are obligatory for those who are not domiciled in the EU. The fiscal representative acts exclusively and comprehensively in the administration of tax matters in Hungary.
Not everyone can provide fiscal representation services: the Hungarian Tax Administration Act imposes strict rules on such service providers. A fiscal representative can be a limited liability company or a joint stock company with a registered capital (or bank guarantee) of at least HUF 50 million (approx. EUR 140,000 or GBP 125,000) and shall have no tax debt. But perhaps the most important requirement is that the fiscal representative is jointly and severally liable for the tax liability of the foreign company, i.e. the Hungarian tax authority (abbreviated as NAV in Hungarian) can demand all tax debts or fines from both of the fiscal representative and the foreign company. The Hungarian Tax Authority maintains a register of fiscal representatives and reviews the existence of the conditions described above on an annual basis.
It is important that non-EU companies, i.e. companies based in this case in Great Britain, need a fiscal representative to simply own a Hungarian VAT number, so they do not only have to contract with such a service provider when they have an actual commercial relationship with a Hungarian company.
Summary
As we have indicated, the agreement is not yet final, but fundamental changes may no longer be expected. During the negotiations, the declared aim of the UK was to reach an agreement with a content similar to that of the EU – Canada Free Trade Agreement. However, as the UK has also been able to fight for significant customs reductions and exemptions, it can be said that the current agreement is more than the aforementioned, essentially unique between the EU and a third country. The question is how this will affect the future of the European Union: will other EU countries follow the United Kingdom, encouraged by their knowledge of the details and practicalities of the agreement?
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Should you have any further questions regarding the tax aspects of Brexit or the fiscal representation that arises in connection with this, VGD Hungary’s tax advisors will gladly assist you, even within the framework of our fiscal representation service.
