How will Brexit Impact Contractors and VAT?
44% of the contractors and freelancers in the UK do not think that Brexit will affect them. This data was gathered through a poll of 1,350 UK freelancers and contractors. It also showed that 18% of freelancers and contractors feel that Brexit will positively influence their business while 38% believe that Brexit will affect their business negatively. It is still advisable to have a conversation with your contractor accountants to understand if your specific situation might be impacted by the changes Brexit will bring.
Working in Europe
Data from 2018 shows that approximately 45,000 UK contractors live and pay taxes in Britain. However, they are employed by companies located on the mainland. Other people work short-term contracts or commute to mainland Europe. As of right now, many people are eligible to work in Europe because Britain is part of the European Union which makes these people very concerned about Brexit as they might lose their opportunity to work outside the UK.
Businesses in Europe will automatically favour hiring people from EU countries over people in Britain. However, it won’t all be a sudden change; there will be a transition period where contractors will be able to prepare for life after EU membership. This transition period will last until 31st December 2020. During the transition period, the free movement will continue the same as before and will allow contractors to look for work in Europe.
Investment in businesses, as well as people, will slow down because employers won’t be too sure about what will happen post-Brexit. This uncertainty will bleed into hiring decisions. Many businesses might also opt to move out of the UK which will cut down on how many contractor jobs are available. This has already happened pre-Brexit with many banks such as Lloyds, Bank of America, Barclays and so on moving their EU headquarters to Dublin as well as other capitals on the mainland.
In addition to all of this, the US has 25% of its EU technology spent in Ireland. Ireland is very attractive to large corporations such as Google, Apple, and Amazon because of its low corporation tax rate which sits at a shockingly low 12.5%.
Similarly, companies such as Nissan and Honda might follow their lead by leaving the UK and setting themselves up in other parts of the European Union. If by some miracle they opt to stay, they might cut down on their manufacturing facilities in the UK which will result in a loss of jobs.
Hiring permanent staff will slow down significantly until employers are sure about how Brexit will affect them. However, new projects, as well as system changes, will have to be done. This will result in contractors not being out of a job because businesses will continue hiring contractors as the full impact of Brexit will probably not be known for months or maybe even years.
How is VAT affected?
Leaving the EU will require a UK legal basis for VAT. As of right now, it’s unclear how significant or minimal the changes might be. However, it’s unlikely that the government will abandon transaction tax as it is a valuable source of revenue.
At this stage, the only clear thing is that transactions with other EU countries will be affected. When the exit is formalised, an expected result of it is that goods that will be brought into the UK from an EU country will be subject to VAT as well as import duty. The same will also be true for exports from the UK to EU countries.
An EU simplification which is known as triangulation currently exists, which states that goods moved from an EU country to another by a business registered for VAT in the UK is VAT free for the UK business. Once Brexit is finalised, UK businesses will no longer benefit from triangulation and will be required to register for VAT within the EU.
Another EU simplification exists called distance selling of goods. This simplification states that small amounts of sales to customers in other EU countries do not require the supplier to register for VAT in the customer’s country. However, once the UK leaves the EU, either the UK business will have to register for VAT in the customer’s EU country, or the customer will be responsible for import VAT as well as import duty.
The rules that exist at the moment deal with services bought and sold with EU countries should remain unaffected for the most part. Supplies from non-EU countries currently are VAT-free in the hands of the supplier whether they are in the EU or outside it.
The changes to VAT could also be much more wholesale than expected. Companies would do well to contact contractor accountants, VAT accountants, VAT specialists and so on if they’d like to stand on the better ground concerning Brexit.
Whatever the outcome of Brexit, things will be interesting in the coming months as well as years.
Clear House Accountants are specialist Contractor Accountants, we work with contractors advising them on the best and most efficient way to save tax and extract money from their business. We are also experts in IR-35 related matters and work with clients to create smart solutions for IR-35 related problems.
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