Although customs duties and VAT are very directly affected by Brexit, it has much less of an impact on corporation and income tax. There are some marginal EU impacts, which will not directly affect traders in most circumstances in particular, where they do not have a group.
The issue of tax is very important in terms of whether traders either choose to form a company in the UK or form a branch by achieving a certain degree of business presence in the United Kingdom. This is something that might happen as a strategic business decision or by inadvertence in the case of a branch.
There are double taxation rules which exist under treaties between states. They will not be affected by Brexit. However, the applicability of the double taxation treaties both for the company and employees may be critically affected by whether traders have a UK company branch.
Forming a UK company and doing business through it may affect the income tax status of existing employees. This would depend on the exact nature of their tax treatment. Employment by a UK company in place of an Irish company would require prior consideration as to how it would impact on this treatment and whether and what steps need to be taken with a company in place to mitigate these effects (taxation) if this is possible at all.
The article also illustrates the general nature of UK VAT which would be relevant if an Irish company or trader either formed a UK subsidiary or a branch of its Irish company in the UK. The issues in relation to the formation of a company are separate and should be considered accordingly.
General Strategy and Tax
If traders decided to form a UK company and trade through it, they would need to review the overall tax position very carefully. There are complex group issues when taxation and company law issues interact. What is right in one circumstance for one purpose is not necessarily right in other circumstances and for other purposes.
Traders should take their accountant’s advice from an overall tax perspective, as to whether a UK company, should be a subsidiary of the Irish company or each owned by a third holding company. There can be advantages in having a group structure. There can be disadvantages as the shares themselves would be assets of the holding company so might be lost if it because insolvent. The entire matter could be tipped one way or the other by the totality of the particular tax position now or as apprehended in the future.
Regardless of whether a business maintains a UK company or a branch or not, an Irish company can have PAYE obligations for any employment “exercised” within the UK.
UK Company Corporation Tax
The UK rate of corporation tax is 19% and had been scheduled to be reduced. The Irish rate is 12.5%. With double taxation relief, traders would effectively get credit in Ireland in respect of the UK elements of the trade, for UK corporation tax paid on UK profits if they had a UK establishment.
If traders have a UK company, it will be taxed in the UK and is subject to UK corporation tax. This is like Irish corporation tax. The general rate is 19% and is scheduled to be reduced gradually, but there is no guarantee of reductions. Traders would be obliged to file corporation tax returns under a system similar to but distinct from that in the Republic of Ireland.
Traders are likely to need UK accountants to both prepare financial accounts and do their tax returns. They may find accountants in the Republic of Ireland who are qualified, but there are relatively few who would have the regulatory status and necessary insurance to do so, even prior to Brexit.
Complex tax issues would arise if the UK company was controlled from the Republic of Ireland, which might entail a certain degree of double taxation and consideration of the double taxation treaty. Traders would need to consider the interaction of all of these factors carefully if they decided to form a UK company and trade through it.
If there were profits in the UK company (assuming it is not also Irish resident), there would usually be no Irish tax at least until a dividend is paid to the Irish company. In contrast, taxation, in Ireland would arise if and when dividends were paid to the Irish company. This is provided trader’s UK company is not deemed controlled from Ireland, but relief may apply. Exemptions and credits might be available respect of a dividend income inwards. The position is potentially complex.
Any Irish company could be taxed in the UK if it had a permanent establishment there. It is taxed on the profits of that permanent establishment. It would also be subject to Irish corporation tax on the same profits but would receive a credit for UK corporation tax paid on those profits. The actual calculations are complex and intricate. This is the broad position.
If traders trade in the United Kingdom through their Irish company and had sufficient presence for there to be a branch or more correctly a “permanent establishment”, the Irish Company would be obliged to make branch returns to the UK Companies House. A branch would require registration and filing some basic information, including accounts on an ongoing basis.
Equally from a tax perspective, traders would need to make up accounts of the branch for corporation tax purposes in the United Kingdom. They would need to return these to HMRC in much the same way as for the company because the entity would be deemed to be trading in the United Kingdom.
The concept of a permanent establishment is very slippery and can involve judgements of degree. Basically, a permanent establishment is the presence of a company (say the Irish company) in another state (say the UK). This was often referred to as a branch. Basically, at a certain degree of presence of an Irish company in the UK, it becomes a permanent establishment.
The existence or otherwise of a permanent establishment does not just determine issues of tax in this context. Where there is a permanent establishment, it would mean that the profits of the permanent establishment are taxable in the place where there is a permanent establishment, in this case, the United Kingdom. The home country, in this case, Ireland would give a credit in respect of double taxation on those profits in respect of Irish taxation on the same profits.
If a foreign company has a sufficient degree of presence, it is treated like a home company for many purposes of companies and tax law.
Personal Tax issues
Apart from taxation at the company level, including VAT and corporation tax issues, employing or even financing the employment income of employees through a UK company may affect their personal tax status. If they are reliant on the existing double taxation treatment, the fact of their being paid by or through a UK established company or branch/base, may impact on their tax status. It may affect both the personal tax liability of employees as well as trader’s obligation as an employer to pay UK PAYE for tax and National Insurance for them.
In principle, double taxation relief should ultimately mean that in most circumstances, employees pay tax (only) at the higher effective rate of the two countries. However, the relevant taxation reliefs have to be claimed. Tax returns are usually required in each country if they are within the scope of both Irish and UK tax unless an exemption is granted.
All of these issues should be carefully considered before forming a UK company. Traders should keep the position under review on an ongoing basis as circumstances change. The original basis and assumptions may have changed by reason, for example of the status of particular employees. For example, in spending more days in the UK than might historically have been the case, traders or they might inadvertently creep into these issues even without a UK company.
General VAT Issue
The most likely scenario is that traders can continue providing services from Ireland into the UK on the same basis as to date. There may conceivably be considerations depending on the post-Brexit landscape by which it is desirable for traders to form a company in the UK to service their UK customers /clients.
If traders choose/had to trade through a UK subsidiary this would carry an immediate obligation to account for and charge VAT in the United Kingdom if the annual turnover would be likely to exceed the threshold (£85,000). In some cases, there is an obligation to register below this threshold, such as for a non-established trader. Whether or not this is the right decision, depends on a number of factors. It is largely a business call involving a blend of branding and marketing considerations as well as procurement rules, tax, and regulatory issues. We have dealt with the issues in other articles.
As in Ireland, there is extensive information available about UK VAT on the HMRC website. VAT law changes from time to time in particular annually under the Finance Act. VAT law is very heavily influenced by EU law. The UK has already passed legislation which is designed to re-enact VAT legislation as an exclusively UK tax after Brexit.
The general rate of UK VAT is 20%. It has been 20% for many years and was 17% prior to that. The obligation to charge VAT applies to taxable supplies of goods and services made in the United Kingdom by a taxable person. VAT generally arises when the services are performed. As in Ireland, if the VAT invoice is issued or a payment on account is made prior to that date, these events bring forward the time of supply and the accounting and payment obligations.
UK VAT applies when there is a supply of services within the United Kingdom. The rules in relation to services provided from other EU states apply in the UK in the same way as Ireland, but in reverse from an Irish perspective. UK taxable persons are obliged to self-account for VAT on imports of goods and services from outside the UK.
Obligation to Register for VAT in the UK
A person/business/ company (such as a new UK subsidiary) is taxable and must charge and account for VAT if it is are either registered or required to be registered because of their turnover or other conditions. If taxable supplies are or will be in excess of the ceiling adjusted annually, the taxpayer must register for VAT with HMRC. Registration is with the local VAT office. The threshold for registration at present is £85,000. There is a rule that also takes into account the turnover of connected entities.
A person/company must be registered if at the end of any month, the value of the taxable supplies over the previous month exceeds the threshold exclusive of VAT or at any time there are reasonable grounds for believing that the value of the taxable supplies that it will make in the next 30 days will exceed the threshold. HMRC must be notified within 30 days of the relevant month when reasonable grounds exist.
It is possible to register voluntarily if a company is making taxable supplies by way of business. There are conditions. In this case, the company may recover VAT on purchases but takes on the obligation to charge VAT on sales which would not otherwise exist.
VAT Procedures in the UK
The general rule is that VAT (including on services) must be accounted for on a quarterly basis. The quarterly or other accounting periods are allocated at the time of registration by HMRC. The default position is that VAT returns must be made online. The tax payable must be received by the end of the month following the end of the relevant quarter.
In the same way, as in Ireland, VAT on inputs, i.e. purchases for the purpose of the business subject to VAT may be recovered or offset against VAT liability.
The UK VAT administration and accounting obligations are very similar to those in Ireland. As a VAT registered UK business, traders must keep records and account for six years together with supporting documentation. They can be inspected and audited by HMRC. The invoice must show the same broad details as in Ireland namely
- the identifying number
- time of supply/date of issue
- name address and registration number of the supplier
- name address of the person supplied
- the description to identify the goods or services
- unit price if applicable
- the gross amount payable excluding VAT expressed in a currency
- rate of any cash discount offered
- the total amount of VAT chargeable in sterling
There are various options for changing the filing dates and their regularity. Smaller businesses with a turnover of less than £1.35 million within 12 months may make an annual return. However, nine monthly payments must be made by direct debit based on the previous year’s results. There are provisions for cash accounting as in Ireland. Bad debt relief is broadly similar.
UK VAT Enforcement
There is a system of penalties for failure to comply. The penalties as in Ireland are graded with reference to whether the taxpayer
- has taken reasonable care
- has failed to take reasonable care
- there has been a deliberate understatement or over claim
- an aggravated deliberate understatement or overclaim
Generally, the first category does not incur penalties while the second third and fourth category incur increased penalties.