With less than two months to go before the deadline for the UK’s exit from the European Union, the Brexit Effects continue to be surrounded by uncertainty. Generating a major bewilderment as to what their final agreement, if any, will be.
29/March/2019 is the date for departure from the EU, except for last-minute changes. The agreement negotiated between the Union and the British Government provided for a transitional period until 31 December 2020. During which Community legislation would continue to apply in the United Kingdom in relation to the internal market, customs union and Community policies.
However, the rejection of this agreement by the British Parliament opens up the possibility of what is known as a “hard Brexit”. This means that from 30/March/2019 the United Kingdom would cease to belong to the EU without any transitional period. It would be considered to all intents and purposes an extra-Community country. With the effects detailed in this note and affecting a variety of taxes. In particular, VAT, customs duties and Non-Resident Income Tax.
Faced with this possibility, and despite the prevailing uncertainty, it is advisable to prepare as early as possible for the worst-case scenario. We already commented on this in our note of 8 January on Brexit and the Tax Agency.
We now analyse how the new situation will affect our logistical and operational flows.
Brexit Effects on Customs: VAT and Tariffs
During the United Kingdom’s stay in the EU, the sale and purchase of goods between British companies and those of the rest of the Union have been considered as intra-community operations. In such a way that:
- The sale of goods to British companies has been considered an intra-community delivery of goods. It is not subject to customs formalities and is exempt from VAT.
- The purchase of goods from British companies has been considered an intra-community acquisition of goods. They are not subject to customs formalities or import duties. As far as VAT is concerned, it would be the purchasing company that would levy the tax itself. And it would be deducted, if entitled to it, by application of the reverse charge mechanism.
With Brexit, goods sent to the United Kingdom will be treated as exports to a third country outside the Union. For VAT purposes, however, exports are also exempt from VAT. However, for customs purposes, management will be subject to the corresponding formalities in Customs, through the customs export declaration.
What will be new
In the meantime, the big change will be in purchases of goods from the UK. They will be taken into consideration for imports, with the following implications:
- The entry of the goods will require the presentation in Customs of the corresponding customs declaration of import. Single Administrative Document or SAD
- The entry of goods into Spanish territory will require payment of the corresponding VAT to Customs. As well as the tariffs corresponding to the tariff code attributed to the goods in question.
Therefore, the big difference with the previous situation will be the payment of import duties. And also the need to face at the time of import the corresponding VAT, which is settled in the SAD.
Even if the company has the right to deduct input VAT, dealing with import VAT can be a financial problem. It will therefore be necessary to evaluate the possibility of invoking the system of VAT Deferred on Imports. This allows the payment of the tax to be deferred at the moment of presenting the periodic VAT self-liquidation. Although this is only possible for those companies that pay VAT monthly, either because they have the status of large companies, or because they have voluntarily applied for registration in the REDEME.
In both cases, these companies will be obliged to comply with the obligations established by the Immediate Supply of Information (SII). That obliges the companies covered by it to transmit within very tight deadlines to the AEAT all the information on their invoices issued and received.
Brexit Effects on tax returns
In addition, the Brexit will also have formal effects on the statements to be filed by companies in Spain.
Specifically:
- Transactions with the United Kingdom will cease to be intra-Community transactions and should therefore not be included in Model 349.
- Sales and purchases of goods with the United Kingdom will also cease to be declared in Intrastat, both in introduction and dispatch flows.
Finally, those companies that buy or sell goods to the United Kingdom should bear in mind that in their customs formalities they will require the possession of the corresponding EORI number, valid for carrying out customs formalities in the European Union. If it is not yet available, it can be requested automatically on the AEAT website.
Brexit Effects: VAT on services provided to the United Kingdom
Although the effects of Brexit on the sale of goods to the United Kingdom have taken centre stage, it should be noted that the exit of the United Kingdom from the Union will also have important consequences on the VAT treatment of services provided by Spanish companies to British individuals and companies.
Without entering into the multiple exceptions provided for in the VAT Act, during the United Kingdom’s stay in the EU the VAT treatment of services provided by Spanish companies to recipients in that country would have had the following treatment as a general rule:
- Services provided to British companies. These services are located in the United Kingdom, invoiced without VAT by the Spanish company and the British company is obliged to self-repute VAT in its country, due to the application of the taxable person’s investment.
- Services provided to British individuals. Location of the service in Spain, subject to Spanish VAT at the corresponding rate.
Brexit fundamentally affects these rules for locating VAT services. Therefore, if we provide services to the United Kingdom, we will have to carefully evaluate how Brexit will affect us.
Services to British individuals after Brexit
As a non-EU country, services to British individuals will continue to be subject to VAT in Spain. Except for an extensive list of services that will no longer be subject to VAT.
These are:
- Assignments and concessions of copyrights, patents, licenses, trademarks and other intellectual or industrial property rights. As well as any other similar rights.
- The assignment or concession of goodwill, exclusive purchase or sale rights or the right to exercise a professional activity.
- Advertising.
- Advice, auditing, engineering, law firms, lawyers, consultants, accountants or tax experts and other similar. With the exception of those relating to real estate.
- Data processing and the provision of information. Including commercial procedures and experience.
- Translation, correction or composition of texts, as well as those provided by interpreters.
- Insurance, reinsurance and capitalisation, as well as financial services. Including those that are not exempt, with the exception of the rental of safe deposit boxes.
- Staff secondments.
- Film dubbing.
- Leases of movable tangible property. With the exception of those relating to any means of transport and containers.
- The provision of access to natural gas networks located within the territory of the Community or to any network connected to such networks. The electricity, heating or cooling network, and transport or distribution through such networks. As well as the provision of other services directly related to any of the services covered by this paragraph.
- Obligations not to provide, in whole or in part, any of the services set out above.
Services to UK companies after Brexit
Once the UK’s exit from the EU is consumed, the rules for locating UK business services will also change. Thus, as a general rule (and with the exceptions provided for in the Law) the services provided by a Spanish company to another British company will be located in the United Kingdom, not being subject to Spanish VAT.
However, the VAT Law provides for a “closing rule” whereby services provided to non-EU companies will be subject to Spanish VAT. This would be the case in the United Kingdom, when its effective use is going to take place in Spain.
The services affected by this rule of closure are:
- Those listed in the private listings in this notice.
- Mediation services in the name and on behalf of others.
- Leasing of means of transport.
- Services provided by electronic means, telecommunications, broadcasting and television.
In other words, this list covers many of the most common services between companies. As far as providing services to British companies is concerned, it is necessary to analyse in depth whether we are affected by this closure rule. Studying whether these operations that were invoiced without VAT become subject to Spanish VAT of 21%.
Effects of Brexit: Income obtained in Spain by residents in the United Kingdom. Real Estate
There are many British citizens who, residing in their country, own real estate in Spain. The Brexit will also have effects for them. Since the possession of these properties that do not constitute their habitual residence means obtaining income in Spain subject to taxation in the Non-Resident Income Tax.
- If these properties are rented to third parties. Up to Brexit, UK residents would be taxed at a rate of 19% on the yield of these rents, determined by the difference between the income generated and the deductible expenses. After leaving the European Union, the rate to be applied will be 24%. And it will not be possible to deduct expenses, so it will be taxed on the income earned.
- In the case that the buildings are not rented. It presupposes the existence of income to be taxed in Spain. Specifically, the income to be integrated as obtained in Spain would be 1.1% or 2% of the cadastral value. Depending on the municipality. On this taxable base, residents in the United Kingdom would be taxed at 19%, but with Brexit it would rise to 24%.
- If properties are rented for part of the year. And they remain available to their owners for the rest of the year. You will have to pay tax in proportion to the number of days in each situation according to the rules mentioned above.
Whatever your case, we can help you. Please do not hesitate to contact us.
Arrabe Integra
Tax Consulting Department