It is now less than 3 working weeks until the UK’s transitionary period finishes and there is still no sign of a trade deal between the UK and the bloc. For most businesses in the UK, the die was cast nearly two years ago when it became apparent that a comprehensive trade deal on services would require a level of alignment that is politically impossible.
So much airtime has been given to exporters of goods and fisherman, but what about the services sector which makes up the majority of the British Economy? Well, if you do business with European customers or have European suppliers you will be affected to some extent.
VAT on services
The good news on VAT is that the treatment of professional services (except those involving property) billed to European customers is similar. From a UK perspective, the place of supply of most legal, consulting, or accounting type services will be where the customer is located. Where that customer is located outside of the UK, the supply will be outside the scope of UK VAT. If the customer is a business, then the customer will be responsible (as they are at present) for accounting for any VAT in their country under the ‘reverse charge’ mechanism.
For supplies of services connected with land in European country, such as architecture or structural engineering, one will continue to have to check whether the customer can operate a ‘reverse charge’ or whether your business will have to register for VAT in the customer’s country. This is country specific as before.
All good, right? Well not exactly. The use of the ‘reverse charge’ system is an essential simplification used by professionals to avoid registration for VAT in multiple jurisdictions. A requirement for the reverse charge under EU rules is that you are a taxable person – in other words that you are a business. In many countries (examples include Italy and Greece) the local interpretation of that is that you must have an EU VAT number. Will a UK VAT number be accepted? We don’t know. All we do know is that European customers will be nervous about dealing with UK established businesses and may make rendering invoices and getting paid difficult.
The current situation with direct taxes, such as income tax and corporation tax, at least in principle remains the same. The UK has an extensive bilateral treaty network with individual member states. Having said that, the protection that UK taxpayers have from European tax authorities treating them unfairly is underpinned by European law and its Court. With our government intent on removing the oversight of the European Court of Justice, we simply don’t know if an effective new system will exist. Sceptics might expect an increase in arbitrary and unfair treatment of UK businesses and individuals with foreign tax dealings in Europe.
The increased tax risk for doing business with European customers means that businesses would be wise to seek tax advice before contracting with a European customer in a jurisdiction they are not familiar with. This will be especially true if there are staff or sub consultants ‘on the ground’ in the customer’s jurisdiction.
Employee visas and settled status
From 1 July 2021, you will need to ensure that employees who are EEA, EU or Swiss citizens rather than British citizens are permitted to work for you. Between now and 30 June 2021, your existing employees and any new recruits already in the UK can apply for ‘settled status‘. If they have not already done this, you should be encouraging them to do it over the Christmas break!
New EEA, EU or Swiss employees after 1 July 2021, if they do not have settled status, will need a UK visa allowing them to work. Some prospective employees may be able to obtain this visa themselves, but many would need an employer to sponsor them. To be able to do this, your business must apply for a licence which costs at least £536 and takes a couple of months to issue.
Once you have your licence, you will still need to apply for and pay for a certificate of sponsorship for each job you recruit for. You will also need to ensure that your job meets the criteria for a visa, which are specific to your profession. For example, qualified accountant jobs have to pay more than £30,000 and chartered accountant trainees must be paid at least £21,000. In all cases, the applicant must meet minimum standards of English. These hurdles may be fine in theory, but it is additional compliance cost and time for each and every new hire.
Recognition of qualifications
Recognition of qualifications, whilst not given much publicity, could actually turn out to be more of battle for some businesses than the other areas. At present both the UK, EU and EEA states, and Switzerland are required to recognise the qualifications of most regulated or chartered professionals from across the bloc, as long as they are broadly equivalent. Where there is a shortfall in experience, a conversion qualifying period can be imposed. Those rules were designed to allow as much flexibility as possible whilst protecting the rigour and quality of regulation.
From 1 January 2021 the UK is a ‘third country’ and no member state is required to recognise any UK professional qualifications nor to allow UK businesses to access customers in their countries unless they submit to local regulation. What member states do in practice will vary by country and by sector. Careful planning when pitching to an overseas client will be essential and steps may include partnering or sub consulting via local professionals, or setting up fully fledged regulated subsidiary entities.
This will also impact on UK businesses with senior employees or partners with non-UK qualifications. From 1 January 2021 there is no automatic right to be able to practise in the UK, and every professional practice ought to have already discussed the necessary steps with their professional body.
One thing is for certain, dealing with European customers, suppliers and staff is now unfortunately more complex and more expensive.
About the author
Alex Shall is a general practice ICAEW Chartered Accountant and business advisor.
Alex works principally in the professional practices sector, advising architects, designers, engineers and other consultants on financial reporting, commercial and taxation matters. He also works on succession planning and dispute resolution for professional practices.