According to Agreement on the withdrawal of the United Kingdom from the European Union, there is a transition period from 1 February to 31 December 2020. The European Union law shall be applicable to and in the United Kingdom during the transition period.
How will the taxation of excise goods change?
Taxation of excise goods 01.01.2021 if there is no new agreement concerning taxation during 2020
Since 01.02.2020, the United Kingdom is no longer in the EU. Until 31.12.2020, the free movement of excise goods between the United Kingdom and the EU will continue and electronic delivery notes (eSL) are submitted in the EMCS under the temporary exemption from dispatch of good.
Since 01.01.2021 at 00.00 all UK excise authorizations will be invalidate and from that date electronic delivery notes (eSL) will not be issued in the United Kingdom.
Electronic delivery notes for which no acknowledgment of receipt has been entered by 01.01.2021 must receive final status no later than 31.05.2021 00:00 (CET).
Since 01.01.2021, Northern Ireland will join the EMCS. A delivery note (eSL) must be made out in the EMCS when a temporary exemption is sent to Northern Ireland.
How will the taxation with VAT change?
According to Agreement on the withdrawal of the United Kingdom from the European Union, there is a transition period until 31 December 2020. The European Union law shall be applicable to and in the United Kingdom during the transition period.
It means that until the end of 2020 there is no changes in the taxation with VAT of transactions, related to the United Kingdom. Until 31.12.2020, the acquisition of the goods from the UK from a VAT payer is still taxable and shall be declared as intra-Community acquisition of goods – and the transfer of goods to the UK to a VAT payer is still taxable and shall be declared as intra-Community supply of goods. If on the day when the transition period ends (31.12.2020), the transport of goods from Estonia to the UK or from the UK to Estonia is not finalized – the transaction is also still treated as, accordingly, intra-Community supply or intra-Community acquisition of goods. Upon the taxation of services, until 31.12.2020 the UK persons are the persons of another Member State.
Estonian VAT payers who have paid VAT in the UK before 31.12.2020 and wish to lay claim for refund of VAT, paid in the UK, through the EC cross-border VAT refund system – such VAT payers shall submit their refund applications to the UK tax authority at the latest on 31 March 2021. Amendments to MOSS VAT returns, related to the provision of digital services to the UK non-taxable persons before 31.12.2020, shall be submitted at the latest on 31 December 2021.
How will the taxation with income tax change?
The withdrawal of the UK from the EU has no influence to the convention between Estonia and the United Kingdom of Great Britain and Northern Ireland for the avoidance of double taxation with respect of tax on income.
Taxation with income tax since 01.01.2021 if there is no new agreement concerning taxation during 2020
- When the UK withdraws from EU and is not a member of the EEA either – then the Estonian resident company must take into consideration that the income tax is not charged on dividends according to clause 50 (11) 3) of the Estonian Income Tax Act in the following conditions:
the Estonian company paying the dividend has derived the dividend which is the basis for payment from a company where at least 10% of the shares or votes belonged to the Estonian company at the time of deriving the dividend, and
in the UK income tax has been withheld from the dividend or income tax has been charged on the share of profit which is the basis thereof.
Hence, the taxation of profit in the UK shall be certified.
Before the withdrawal of the UK from the EU it was sufficient for the tax exemption on dividends if the dividend was derived from a UK company where at least 10% of the shares or votes belonged to the Estonian company. The Estonian company had no obligation to present the certification about the taxation of profit. (Clause 50 (11) 1) of the Income Tax Act)
Also, profit of the Estonian resident company’s permanent establishment located in the UK is exempt from tax in Estonia only if income tax has been charged on such profit in the UK (clause 50 (11) 4) of the Income Tax Act).
Before the withdrawal of the UK from the EU it was sufficient for the tax exemption that profit was attributed to permanent establishment in the UK (clause 50 (11) 2) of the Income Tax Act).
Royalties, payable to a tax resident of the UK, shall be declared and tax advantages stipulated in the convention for the avoidance of double taxation are applicable only if the certification about the UK residency is presented.
Before the withdrawal of the UK from the EU income tax was not charged on royalties paid to a tax resident of the UK in the case of associated persons (subsection 31 (4) of the Income Tax Act).
A natural person who is a tax resident of the UK cannot submit an income tax return of the Estonian resident for using tax advantages stipulated for the Estonian residents upon the taxation of their Estonian income (the basic exemption, increased basic exemption upon provision of maintenance to two or more minor children, deduction of housing loan interests) and cannot carry forward the tax advantages to the spouse.
How is social tax imposed during the Brexit transition period?
The transition period takes place from 1 February 2020 to 31 December 2020. During that period, social security taxes on employers’ wages in cross-border situations are imposed as before the UK's withdrawal.
The rules on the coordination of social security systems established in Regulation No 883/2004 of the European Parliament and of the Council stand effective in the UK until the end of the transition period. Therefore, Single Tax Principle of one country insurance and the taxation on the basis of A1 certificates only one country, will both be applied to workers migrating to Estonia from the UK as well as the other way around:
if an Estonian employer sends their employee to the UK and the Estonian Social Insurance Board, upon the employer’s application, has issued an A1 certificate affirming that the employee will be socially secured in Estonia during the business trip, the social tax, unemployment insurance charges and funded pensions charges from the employee’s salary shall be declared and paid in Estonia;
if a resident of the UK comes to work in Estonia, carrying an A1 certificate issued by a competent UK social security institution, social tax will not be imposed on their salary in Estonia. However, if they do not have an A1 certificate issued by an institution of the UK, the salary paid to a UK resident for working or providing a service in Estonia, will be taxed in Estonia according to the Social Tax Act and the Unemployment Insurance Act.
if an employee works in several countries at the same time, including the UK, it is highly recommended for them to apply for an A1 certificate from a competent institution of the country of habitual residence in order to prevent double taxation or taxes being imposed in the wrong country.
It remains to be seen what will happen after the end of the transition period when the EU and UK have come to an agreement about their future relationship.
- The European Commission website "Brexit – how to get ready for the end of the transition period"