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Budget 2021 and the 2020 Brexit Omnibus Bill

27 October, 2020

Brexit was one of the dominant themes in Budget 2021. While the successful negotiation of a zero tariff Free Trade Agreement between the European Union and the United Kingdom is the result that all Irish businesses crave, a significant change to the trading relationship with the United Kingdom is imminent regardless of the outcome.

The most significant disruptor will be in the area of customs, with many businesses facing a myriad of new requirements and paperwork. The Government is somewhat hamstrung in terms of tax mitigation measures it can introduce as the competence for customs and trade policy lies with the European Commission. As such, in Budget 2021 we saw targeted spending and support measures introduced to bolster the most impacted sectors of the economy.

An aerial photo of Poolbeg lighthouse at sunset, overlooking Dublin bay in the background.

While there are no specific measures in the Finance Bill 2020 targeted at the impact of Brexit, in September 2020 the Government published the General Scheme of the Withdrawal of the United Kingdom from the European Union (Consequential Provisions) Bill 2020, (the '2020 Brexit Omnibus Bill'). It is expected to be brought before the Oireachtas in November. The Bill looks to address a wide range of issues likely to arise for citizens and businesses from the end of the transition period. Part 8 deals with Taxation and it aims to maintain the status quo in relation to the operation of many key tax measures which require residence of the EU or the European Economic Area (EEA). A number of important measures are, however, absent from the draft Bill and these have been raised with the Department of Finance. We have highlighted these below. These measures have equally not been covered in the Finance Bill.

Key Brexit themes in Budget 2021

  • Budget 2021 was based on the assumption of a disorderly Brexit, that no trade deal would be agreed and that the EU and UK would be trading on WTO terms
  • Recent Budgets provided extensive provisions for Brexit support measures and targeted measures had previously been introduced in the July Jobs Stimulus package such as the €20 million Brexit support package for businesses to help them prepare for the impact of Brexit on Customs requirements
  • A commitment from the Government to access the Brexit Adjustment Reserve was announced earlier this summer by the European Council

A Budget against the backdrop of Brexit

The further extension of Brexit support packages announced for business is welcome, with €340 million available to support customs compliance activities, hiring 500 additional frontier staff and the improvement of infrastructure at Irish ports and airports. While perhaps we might have expected more specifics on Brexit support measures, the Budget provided for a flexible €3.4 billion recovery fund which will be used to stimulate demand in the economy. Part of this recovery fund will be used to support Government decisions next year which may need to be taken to stimulate domestic demand and mitigate the impacts of Brexit and COVID-19 on the economy.

The British Government has stated its intent to disregard parts of the Northern Ireland Protocol, threatening to undermine progress made between the UK and EU on the future trading relationship.

Cross-border movement of goods: Planning for day-one readiness

With negotiations now recommencing but a deal yet to be concluded, companies need to consider and plan for day-one readiness (1 January 2021) and the basis of the 'future trading relationship' for the movement of cross border goods. Regardless of the outcome, there are certain important elements which cannot be overlooked and we recommend immediate actions are taken, with delay in preparations no longer being an option.

  • Companies who will be importing and exporting should ensure relevant UK and EU Economic Operators' Registration and Identification (EORI) numbers are in place so that products can continue to move between the UK and EU
  • Importers and exporters should also ensure that there is some way to connect with the Customs Authorities in order to file customs declarations and will need to appoint a customs broker to prepare and file customs declarations through the UK and EU customs authorities' systems
  • Companies will need to ensure that there is a method in place to pay any customs duties arising. The rate of duty arising on goods depends on their customs classification and, as such, companies will need to confirm the commodity codes for all goods moving into and out of the UK and vice versa
  • The UK has released its draft tariff schedule which defines the duty rate applied to goods entering the UK from third countries. Should the EU and UK fail to ratify a Free Trade Agreement before 1 January 2021 many products shipped from Ireland and other EU Member States to the UK may be subject to customs duty. Companies should take this time to reassess the impact of these additional customs duties on their business

Another challenge for Irish business is the use of the UK as a land bridge (i.e. products transiting through the UK en route to or from Ireland), sourcing products through the UK from countries with which the EU currently has an FTA or storing and distributing non-EU goods (e.g. Chinese or US manufactured goods) from a UK warehouse. All these supply chain models have different and significant customs compliance requirements. In addition to increased compliance costs, there is a risk of 'double duty' where appropriate duty mitigation measures are not put in place. For Irish businesses, there will be a strong reliance on UK partners to facilitate such measures. Without such cooperation, Irish businesses face further increased costs.

In light of the requirement of the customs authorities to maintain the integrity of the EU Customs Union and impose a border of 'some kind', dealing with customs formalities will be a challenge for many companies. One of the biggest challenges businesses will need to address while preparing for Brexit is access to customs and trade knowledge while building a robust corporate customs function infrastructure to support products crossing international borders.

Finally, issues other than customs cannot be overlooked and appropriate consideration needs to be given to VAT, people, regulatory, supply chain and Northern Ireland.

Taxation measures

In the wider tax space, the fact that the UK is no longer a member of the EU or the EEA will impact on the application of many tax provisions to the extent that they involve UK resident companies or individuals.

The 2020 Brexit Omnibus Bill amends many of these provisions to widen their scope to include residents of the UK. As noted above, however, a number of important tax measures are absent from the Bill. These include:

1: Double tax relief under Schedule 24 TCA 97

The application of a number of provisions in Schedule 24 will be restricted in circumstances where a UK company is no longer resident in the EU or the EEA.

An important issue in this context is the potential non-application of Schedule 24 Paragraph 9I which provides for an additional foreign tax credit to Irish parent companies in respect of dividends received from UK resident companies in certain circumstances. This could impact both UK investments and also investments in other jurisdictions via a UK intermediate holding company.

2: Section 110 companies with specified property business

Section 110 companies which hold financial assets that are secured over Irish property may avail of a tax deduction for interest accrued on their profit participating debt finance in certain limited circumstances only. One such circumstance is where the recipient is a company carrying on genuine economic activities which is formed, authorised or resident under the laws of a "Member State", being an EU or EEA jurisdiction.

Institutional investment from UK pension funds and international funds with UK sponsors and managers represents a significant portion of the investment capital utilised in Ireland for key infrastructure projects. To protect this key source of foreign capital and stimulate future investment, we would like to see amendments to permit Irish securitisation vehicles to continue to avail of a tax deduction for interest accrued and paid on debt financing to UK resident recipients.

3: Providing certainty to Irish life assurance companies with UK resident policyholders

Currently, Irish life assurance companies selling directly into the UK market and with UK resident policyholders are permitted to avail of the tax documentation exemption under Section 730D(2A) for Irish exit tax purposes. This exemption permits life assurance companies, on approval by Revenue, to not have to obtain individual non-Irish residency declarations for each customer where such policy has been written through a branch of the Irish company in an EU or EEA country or the policy has been written on a freedom of services basis from Ireland and the policyholder is an EU or EEA resident. If such exemption does not apply and such documentation is not in place, Irish exit tax is required to be operated.

This measure should not pose any risk to the Irish Exchequer and avoids administrative burden for Irish Revenue given the likelihood of refund reclaims under the UK-Ireland DTA.

Such measures are critical to ensure Ireland as a world-class hub for financial services given many UK businesses in this sector have reorganised to ensure continued access to EU markets post Brexit and the importance of the UK market for Irish financial services.

4: Facilitating Irish-UK transactions

The provisions of Part 21 Chapter 1 of the TCA include a number of relieving measures relating to Mergers, Divisions and Transfers of Assets involving companies of different Member States. These include CGT relief in respect of transfers of Irish development land in the course of a reconstruction or amalgamation and in respect of mergers by absorption. The provisions apply only where the companies are EU-resident. It has therefore been requested that the definition of 'company' in section 630 be amended to continue to include a company that is resident in the UK.

We await publication of the 2020 Brexit Omnibus Bill and we would hope that these measures will be addressed.

We are here to help you

As Ireland continues to grapple with the ongoing challenge of COVID-19, focus has understandably shifted away from Brexit and the potential economic impact it may have. However, as we continue to move towards the expiration of the transition period of the withdrawal of the UK from the EU, now is the time to assess your business and be fully Brexit-ready. PwC continues to advise and assist clients on all aspects of their Brexit-readiness plans and to help meet the challenges to come. To learn more about how PwC can advise and guide your business through the challenges ahead, contact us today.

Contact us

John O'Loughlin

Partner, PwC Ireland (Republic of)

Tel: +353 1 792 6093

John O'Leary

Partner, PwC Ireland (Republic of)

Tel: +353 1 792 8659

Stephen Ruane

Partner, PwC Ireland (Republic of)

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