The issue of the United Kingdom staying in the European Union is still ridden with uncertainty, even though the 29 March 2019 deadline for the withdrawal is only one-and-a-half months away. Hungarian companies conducting business in the UK as well as British firms active in Hungary need to consider, in good time, how the change will affect their daily operations and what preliminary measures need to be taken.
This is because the tax implications of Brexit will not be negligible, since fundamental processes in the fields of logistics, transportation, product sales and services will change. In this article we summarise the key information regarding future changes in taxation, which are anything but certain. In other words, we examine which tax implications of Brexit seem to be the most important.
Where to find information on the changes?
The National Tax and Customs Administration (NAV) published its information on tax and customs administration with regard to Brexit in November 2018 and on 31 January 2019 as well, which was supplemented with further important documents (available in Hungarian) on 11 February. The Directorate-General of the Taxation and Customs Union of the European Commission published a statement according to which the preparations for Brexit, not surprisingly, are the issue of the day not only for the EU and national authorities, but for private individuals as well, as the tax implications of Brexit will affect them too.
As the information reveals, in light of the significant uncertainties regarding the content of the withdrawal agreement, taxable entities must be reminded of the legal consequences that will have to be considered when the UK becomes a third country.
What are the plausible scenarios?
If the withdrawal agreement is accepted, the period between 29 March 2019 and 31 December 2020 will be a transition period, when the United Kingdom is still considered an EU member, but will not be allowed to participate in the day-to-day operations of EU institutions. The transition period may be extended once by mutual agreement between the EU and the United Kingdom.
If the withdrawal agreement is rejected, the United Kingdom will cease to be a Member State of the EU as of 30 March 2019. Let us take a look at what needs to be considered if this worst-case scenario materialises.
Any goods transported from the United Kingdom into the customs territory of the EU, and hence into Hungary, or from the EU to the United Kingdom, will be subject to customs supervision, and pursuant to Regulation (EU) No 952/2013 on the Union Customs Code may be subject to customs controls. Among other things, this means that customs formalities will need to be applied, customs declarations need to be submitted, and customs authorities may request security for potential or existing custom debts. Goods transported from the United Kingdom into the EU’s customs territory will fall under the scope of Council Regulation (EEC) No 2658/87 of 23 July 1987 on the tariff and statistical nomenclature and on the Common Customs Tariff. As a result, the appropriate customs tariffs shall be applied on such goods. All licences and permits issued by the customs authority of the United Kingdom and providing authorised economic operator status as well as other permits simplifying customs administration will lose their validity.
Tax implications of Brexit: indirect taxation
The transportation or sending of goods from the United Kingdom into the value added tax regions of the EU, or from the EU to the United Kingdom, shall be considered product imports and product exports pursuant to Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax. This means that import VAT will be charged on goods entering the region, while exports to the United Kingdom will be exempt from Hungarian VAT provided certain other conditions are met as well.
Qualifying movements of goods as exports and imports will have an effect on the use of the EKAER system too (EKAER will not be necessary for exporting to and importing from the UK, i.e. no EKAER ID number shall be requested for the movement of goods).
Taxpayers based in the United Kingdom who purchase or import goods subject to Hungarian VAT, and who want to reclaim the Hungarian VAT, may no longer submit their claim electronically as per Council Directive 2008/9/EC, but may do so in compliance with Council Directive 86/560/EEC. Based on this latter directive, Member States may refund subject to reciprocity.
Taxpayers based in the UK, and who are registered for VAT or have a place of business in Hungary, will need to designate a tax representative (fiscal representative). Under the tax implications of Brexit, registered taxpayers who so far have had no fiscal representation will need to examine what steps are now required.
Aside from the above, one cannot forget that specific rules may take effect from a VAT perspective for services provided by Hungarian companies for private individuals resident in the United Kingdom. These are just some of the issues, and if the UK obtains a status identical to that of a third country, this may impact further on VAT rules for Hungarian companies (e.g. the rules of VAT deductions for loans provided to taxpayers in third countries could be altered).
What will happen to the convention for the avoidance of double taxation?
The provisions relating to direct taxation described in Act CXLIV of 2011 between the Republic of Hungary and the United Kingdom of Great Britain and Northern Ireland on preventing fiscal evasion and avoiding double taxation with respect to taxes on income and capital gains (double tax treaty) shall remain effective, regardless of whether Brexit happens or not. This way, an adequate system of rules will be in place for employees and companies performing cross-border activity. Bear in mind, however, that in a worst-case scenario Brexit will have an impact on the multilateral convention too.
Implications for employee social security
Everyone would be happy if the current system of A1 forms was left untouched, similarly to the Swiss model. (Although Switzerland and EEA countries are not members of the European Union, the same social security rules apply for them in terms of job postings as for EU Member States.) If the worst happens, the lack of a convention on social security between Hungary and Great Britain will only make the situation graver.
To sum up the above, we can safely say that in an ideal scenario we have nothing to do. However, we must also prepare for the worst-case scenario, and for that, nearly every procedure needs to be scrutinised as the tax implications of Brexit may affect anything from simple postings abroad to the transportation of goods.
If you would like more detailed information on how the 2019 tax implications of Brexit may affect your company, please get in touch with the tax experts at WTS Klient Hungary.