One of the most often used and valuable of the Capital Gains Tax (CGT) exemptions is...
Businesses of all sizes recognised that Brexit would introduce many changes, a situation which has been extensively discussed in the media. The focus has been on imports and exports, and the very fundamental differences that companies would face when dealing with their European counterparts.
However, while import and export are very clearly a significant issue, there are many other effects of Brexit which have been overlooked. It is only now, many months after the transition period has passed that companies are identifying what other hurdles they may have to face.
Withholding tax is something that few, if any, businesses would have considered. It is a smaller issue that has the potential to deliver a stinging financial blow, especially as it has largely been overlooked by the Brexit support plans.
We consider the implications of withholding tax, Brexit arrangements and whether there are any simple solutions.
Post-Brexit Tax Agreement
Before turning specifically to the issue of withholding tax, it will be useful to first examine the agreement that the UK is bound to.
From the EU side, there were concerns that the UK could position itself as a type of tax haven by offering advantages not available in the EU. Concerns included tax incentives, lower tax rates and an easing of tax rules, such as those around tax disclosure. Any of these measures could have made the UK a far more attractive option than the EU for investors, something the EU was keen to avoid.
Under the terms of the Trade and Cooperation Agreement (TCA) the UK is obliged to stick to the same OECD tax standards, and is not allowed to offer incentives which are not available in the EU. This means it will not have any advantage over the EU, and the tax position will remain broadly similar to what it was before.
What Does Withholding Tax Mean?
Not every business will have encountered the need to withhold tax before, but now that Brexit has occurred it is an issue that all exporters and importers will need to understand.
In simple terms, if you normally pay interest or royalties to a company based in another country you will now have to consider withholding tax. Although this may sound like a slightly dubious action, withholding tax means deducting tax and giving the money to HMRC when the recipient is not resident in the UK.
This was never an issue between the UK and EU countries before Brexit but since the transition period has elapsed, business owners who regularly transact with EU countries have been forced to consider withholding tax, and vice versa.
WHT and Brexit
Withholding tax (WHT) is one of the thorny issues which has arisen, with companies set to lose valuable reliefs that they previously enjoyed.
While it was a member of the EU, it was fairly simple to make royalty or interest payments to a company in another EU country. The EU Interest and Royalties Directive states that payments can be made to different member states without any need to withhold tax. The UK previously followed this legislation, making the transfer of monies between different countries a very simple matter.
The EU Parent Subsidiary Directive is very similar to the EU Interest and Royalties Directive, allowing dividends to be paid to other companies within the EU without any tax being due.
Although the UK is no longer subject to EU law, there are many elements which it was bound to continue to comply with. This changed for withholding tax in the 2021 Budget when it was announced that with effect from June 2021, the Directive would be repealed in the UK.
This means that from June 2021, a UK business would have been obliged to withhold tax at 20% from royalties and interest, and pass the money to HMRC.
If you own a business in the UK, you are now required to consider whether you need to withhold tax for any interest or dividend payment made to a person or company based in the EU. You may also notice that payments that you receive from the EU are lower than expected because tax may be withheld from your money.
If you have already been withholding tax for certain types of payments made to other countries around the world, the process will be very familiar to you. If, however, you have only dealt with EU countries previously, the system of withholding taxes will be something that is potentially entirely new.
Withholding tax is an essential part of accounting for your business, but if you are lucky you may be able to find other reliefs which apply.
Double tax agreement (DTA) treaties will be the most common solution, but this will not apply to every country. Only certain countries have agreements in place which prevent companies from being taxed twice. A double tax treaty sets out which company gets to keep any tax that falls due while also providing an element of relief against the amount of tax being withheld.
Where there is a double tax treaty, there may be a complete exemption from withholding tax. The only difficulty is that the solution is not universal, so you will need to check for each country and ensure that you stay up to date on any legislative changes. You should also be aware that the rates can vary which means that for some countries, the double tax treaty means that the amount of tax being withheld is not eradicated, but just reduced.
To be able to reduce the tax withheld from the payments you send, the overseas taxing authority will usually have to provide confirmation. This normally means a stamped application form which confirms either the exemption or the reduced treaty rate.
Withholding tax for interest or royalty payments that you send may mean extra work, but the impact on payment being received is potentially far greater. You may lose a significant chunk of your payment that was not previously subject to tax being withheld. You will need to check the relevant DTA whether a credit in the UK applies for all or some of the WHT.
This may mean that now is an opportune time to reconsider the markets you have a presence in and determine whether there are better locations which have a more favourable approach to withholding tax.
The subject of royalties, EU interest and dividend payments may not have claimed the spotlight but the fact remains that you could notice a real increase in the work required, plus a loss in the amount of money you receive.