The UK left the EU at the end of 31 January 2020. The parties then negotiated their future relationship during the transition period which ended at midnight CET on 31 December 2020. At this point the UK left the EU Single Market and EU Customs Union. It was on 24 December 2020 that the UK and the EU announced agreement had been reached on the terms of the “UK-EU Trade and Cooperation Agreement” (TCA).
The UK parliament has implemented the TCA through the European Union (Future Relationship) Act 2020, and it takes effect from 1 January 2021 on a provisional basis, until ratified by the European parliament.
The TCA covers trade in goods and services, digital trade, intellectual property, public procurement, aviation and road transport, energy, fisheries, social security coordination, law enforcement and judicial cooperation in criminal matters, thematic cooperation and participation in Union programmes. The TCA does not govern trade in goods between the EU and Northern Ireland, to which the Protocol on Ireland and Northern Ireland in the Withdrawal Agreement will apply.
Joint Declarations by the UK and EU, published on 26 December 2020, cover various matters, including subsidy controls and countering harmful tax regimes.
In this article, we focus on the provisions in the TCA and Joint Declarations in relation to Customs Duty, VAT, other taxation, social security contributions and benefits, and State Aid.
The TCA is the first zero tariff quota deal that the EU has agreed with any other trading partner. Customs Duty relief will apply to EU goods; to claim preferential rates of duty, a product must originate in the EU or UK (as the exporting country), as set out in the ‘rules of origin’ in the TCA and the ‘Product Specific Rules of Origin’ in Annex ORIG-2 of the TCA.
HMRC has published guidance on the rules of origin and claiming preferential rates of duty. For information on how to meet the requirements in practice, see here. The TCA does not provide universal tariff-free access, and re-exportation of products imported from the EU without sufficient processing will represent a particular risk.
If goods do not meet the rules of origin requirements (or if a business cannot prove that the goods meet them), EU or UK Customs Duty will be payable. There are significant difficulties in determining the precise origin position, and therefore duty position, when materials and components from outside the UK/EU are part of a product manufactured inside them. To find out the rate of duty, a business will need to classify goods correctly, on which HMRC has also published guidance.
Mutual recognition of Authorised Economic Operator (AEO) security and safety schemes will continue.
The most significant additional requirement that the TCA did not remove is that customs declarations and related processes are required for movements of goods between the EU and Great Britain.
With regard to movements of goods from Great Britain to Northern Ireland, there are potential EU customs duties payable where goods are classified as being ‘at risk’ of moving to the EU, typically Ireland.
The TCA does not refer to the detailed VAT changes, but from 1 January 2021, following the end of the transition period with the EU, the VAT rules applying to movements of goods from Great Britain (England, Scotland and Wales) to the EU, or from the EU to Great Britain, will be the same as those previously in place for transactions with countries outside the EU (with some exceptions).
Northern Ireland will maintain alignment with the EU VAT rules for goods, including on goods moving to, from and within Northern Ireland, although it will remain part of the UK’s VAT system.
The TCA does not deal significantly with services, and the main changes in the UK that have arisen are in respect of some exported supplies, where VAT relief is now available where the customer is based in the EU as well as where the customer is outside the EU.
HMRC has published guidance on various aspects, including:
The TCA commits both parties to upholding global standards on tax transparency and fighting tax avoidance. It contains commitments to specific tax standards as they stand at the end of the transition period, including the international standards on exchange of information, anti-tax avoidance, and relevant standards in legislation on public country-by-country reporting by credit institutions and investment firms.
The Joint Declarations state that the parties affirm their commitment to countering harmful tax regimes, in particular those that may facilitate base erosion and profit shifting in line with Action 5 of the OECD Base Erosion and Profit Shifting (BEPS) Action Plan. Harmful tax regimes cover business taxation regimes that affect or may affect in a significant way the location of business activity, including the location of groups of companies, within the Participants. Tax regimes include both laws or regulations and administrative practices.
If a tax regime meets the gateway criterion of imposing a significantly lower effective level of taxation than those levels which generally apply in the Participants, including zero taxation, it should be considered potentially harmful. Such a level of taxation may operate by virtue of the nominal tax rate, the tax base or any other relevant factor.
However, there are no specific provisions constraining the domestic UK tax regime or tax rates.
The loss of EU Directives may result in changes to group tax positions, which will need to be reviewed. In relation to the Interest and Royalties directive, for example, although for the UK the Directive itself does not apply to such payments made on or after 1 January 2021, UK domestic legislation is still in force, and so its provisions still apply to payments of interest and royalties paid from the UK to EU Member States. However, for payments made from an EU Member State to the UK, reference will need to be made to the relevant Double Tax Treaty.
It should be noted that the TCA does not require the UK to continue to apply EU DAC 6 reporting for cross-border avoidance arrangements – the reporting arrangements in the UK have been drastically scaled back – read more.
Mutual Administrative Assistance in Tax Matters
The TCA builds on existing international agreements, including the OECD Convention on Mutual Administrative Assistance in Tax Matters. The UK and EU authorities will continue to cooperate and exchange information relating to VAT, including for the purpose of combating VAT fraud. Either party can also request the other to recover unpaid Customs Duties, excise or VAT on its behalf.
The Joint Declarations state that Jersey and Guernsey shall endeavour to establish arrangements to cooperate with the EU on the recovery of claims related to VAT, Customs Duties and excise duties, within a reasonable time frame.
The TCA sets out the commitments taken by the UK and EU on business mobility, to give firms and individuals legal certainty and administrative clarity to continue engaging in business activity and delivering services in the EU.
This includes well-established commitments on short-term business visitors; business visitors for establishment purposes; intra-corporate transferees; contractual service suppliers; and independent professionals.
The parties have also agreed commitments on length of stay, including the ability for UK short-term business visitors to travel to the EU for 90 days in any 180-day month period. The parties have also agreed not to impose work permits on business visitors for establishment purposes.
Individuals who move between the UK and the EU in the future will have their social security position in respect of certain important benefits protected. Individuals will be able to have access to a range of social security benefits, including reciprocal healthcare cover and an uprated state pension.
Cross-border workers and their employers are only liable to pay social security contributions in one state at a time. Generally, this will be in the country where work is undertaken, irrespective of whether the employer is based in the EU or the UK.
UK workers who are sent by their employer to work temporarily in an EU Member State which has agreed to apply the “detached worker” rules will remain liable to only pay social security contributions in the UK for the period of work in that EU Member State, provided the secondment is for 2 years or less. Similarly, if an EU worker is sent by their employer to work temporarily in the UK from a Member State which has agreed to apply the “detached worker” rules, they will remain liable to only pay contributions in that EU Member State, provided the secondment is for 2 years or less. Workers sent on secondments that are longer than 2 years will be liable to host country social security contributions from the outset.
The UK and EU Member States will be able to take into account relevant contributions paid into each other’s social security systems, or relevant periods of work or residence, by individuals for determining entitlement to a state pension and to a range of benefits. The Protocol also provides for the uprating of the UK State Pension paid to pensioners who retire to the EU.
The TCA ends the EU State Aid regime in the UK, but the Joint Declarations set out non-binding policies for the control of subsidies for disadvantaged areas, transport and research and development.
The policy in relation to subsidies for disadvantaged areas states that the beneficiary should provide its own substantial contribution, and that the subsidy should not have as its main purpose or effect to incentivise the beneficiary to transfer the same or a similar activity from the territory of one party to the territory of the other party.
It will be interesting to see whether the Chancellor takes an early opportunity to provide some new incentives or assistance for businesses in the Budget, due to be delivered on 3 March.