IMGCAP(1)]On June 23, the UK population narrowly voted to end its 43-year membership in the European Union.
It is far from clear when, how or indeed even if the UK will separate from the EU. But the changes will be small for US businesses, limited to some extra VAT (sales tax) and drop shipping complexities. Most trading rules and taxes will not change materially as the UK will want to continue to trade freely and successfully with the EU.
Below are 10 facts about the referendum decision that you should know if you are involved in UK business:
1. No need to make any changes for at least two years
Twenty-eight European countries are members of the EU, a trade, political and monetary association. They have harmonized a range of trade, VAT, workplace regulations and laws that underpin the EU’s Single Market, the world’s largest free trade zone. Since 1999, 19 of the EU’s member states also share the Euro, the region’s currency. The UK did not adopt the Euro.
The start of 2019 is probably the earliest date the UK can complete the notification and negotiation phases of an EU exit. The vote was not binding on the UK’s Parliament; merely advisory. However, it is widely accepted that the UK will notify the EU of its intention to leave by the end of 2016. Once this is done, there will be a two-year renegotiation on the terms of the separation.
2. Will UK VAT rates change?
The standard UK VAT rate is currently 20 percent. It is unlikely to change as a result of this vote since VAT is one of the largest contributors to the UK’s revenues. There may be a small drop in the reduced rates that apply to goods such as e-books.
3. Any changes for UK-based subsidiaries of US companies?
Again, the changes will be extremely limited. Indeed, the UK will be able cut much of the EU red-tape and complex employment law.
4. Value Added Tax is the important issue for US traders.
US businesses selling to UK businesses or consumers need to understand the implications of Value Added Tax, the EU’s sales tax. The UK will retain its VAT. In order to continue to trade freely with the remaining 27 EU countries, the UK is unlikely to change any of its indirect tax rules.
5. VAT changes will be small for US companies selling goods to the UK.
There will be minimal changes for US companies selling goods to the UK. So US companies may still have to UK VAT register if they are importing and selling to UK businesses or consumers.
6. No VAT changes for US services sold to UK customers
There will be no changes to the VAT rules on the sales of services to UK buyers. These services will continue to be effectively VAT free.
7. Extra compliance for US sellers of digital goods & services
Any provider of digital services to EU consumers has to charge and remit the local VAT of the consumer’s country. Since 2015, US companies use the single reporting portal, MOSS. This accepts single, simplified quarterly VAT returns to cover sales and VAT due for all 28 states. A UK exit from the EU VAT regime will mean digital service income to UK consumers will have to be reported separately to the UK tax authorities. This will require a new, separate VAT registration in the UK by US providers, and quarterly UK VAT returns.
Note: Digital services subject to VAT include a wider net of transactions than the US definition of digital goods. As well as e-books, EU and UK VAT is due on service income from consumers for products such as: online membership sites; subscriptions to news websites; hosting services; streaming video, music or games; online education; hosting services; broadcast TV and radio; and telephonic voice and data.
8. Drop shipping costs may rise.
When the UK does leave the EU, it will also leave the Customs Union, a single EU-wide regime for import clearance and tariff charges. The UK will have to set new import duty rates for imports. However, since the UK is historically a free-market trader, it is likely that drop shipping costs will remain the same or even fall.
9. What if you are using the UK as a goods import hub for rest of the EU?
US companies using the UK as their EU import hub face the biggest changes. The UK will be outside of the EU VAT regime, and so imported goods cannot be cleared into free circulation there. This means if US distributors wish to send the goods to customers in Germany, France and other EU countries, they will have clear the goods on entry into those countries. This may lead some US exporters to change their supply chain strategy. They may wish to choose another EU state for their European imports. Countries such as Belgium and the Netherlands have very favorable import regimes and onward transport links.
10. Is there an impact for the US financial services industry?
UK-based subsidiaries of US financial services firms may now lose some of the EU “Passport” rights that enable them to freely sell across the EU. This will affect retail and investment banks, pension funds, insurance companies and stock traders. A lot will depend on the separation negotiations, and the ability of the UK to secure continued access to the EU’s markets.
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