Deal or No-Deal? Tax Questions Remain Amid Brexit Uncertainty

A no-deal Brexit remains a firm possibility following the UK House of Commons’ second rejection of Prime Minister Theresa May’s proposed withdrawal agreement on March 12. That currently makes a no-deal UK exit from the EU a real possibility – and one The Economist has described as “a catastrophe.” Following the second defeat in the House of Commons, a motion rejecting the possibility of a no-deal Brexit was approved on March 13.

Following that decision, the House of Commons voted on March 14 in favor of requesting the EU to extend the UK exit date from the EU beyond March 29 but no later than June 30.

As of today, the UK government will formally request the EU for an extension of the exit date, and the EU will need to approve this request. The EU will likely make the decision on its summit to be held on March 21-22. It can choose to agree to the request, reject it or come back with a proposal to extend the period for a different amount of time than originally requested by the UK. If the third scenario plays out, the new proposed date would then need to be approved by the UK House of Commons. During this period, Prime Minister May could also put her Withdrawal Agreement to a vote before the House of Commons for the third time in the hope of getting it approved, especially given the high risk of a no-deal Brexit occurring.

Given current uncertainty about the eventual outcome of the coming discussions, global businesses and their tax functions should prepare for the possibility of a no-deal Brexit. This scenario would deeply affect companies that conduct intra-EU transactions. Tax management processes related to these transactions – especially those related to value added tax (VAT), customs and digital services – would be disrupted.

If the UK leaves the EU in a no-deal scenario, “the government’s aim will be to keep VAT procedures as close as possible to what they are now,” according to a 2018 UK government bulletin on Brexit’s VAT impacts. “This will provide continuity and certainty for businesses. However, if the UK leaves the EU with no agreement, then there will be some specific changes to the VAT rules and procedures that apply to transactions between the UK and EU member states. The government has taken decisions and actions where necessary in order to mitigate the impacts of these changes for businesses.”

Troubling Brexit-related questions are currently in higher supply than definitive answers; however, that could change, as Prime Minister May has asserted she remains committed to working toward an alternative to a no-deal exit.

For now, Vertex joins others in monitoring Brexit developments and helping our companies prepare for possible outcomes. From a tax technology perspective, we have updated our VAT determination engine with specific place-of-supply logic for post-Brexit UK transactions. This can help companies test UK VAT transactions prior to Brexit. We’ll keep you posted on additional support and changes as they develop.