Brexit was sold to the country in order to ‘take back control’ but many businesses, faced with the prospect of no deal, feel like they’re fighting to stay in control. Getting the technical details of international trade right is going to be essential for many companies to make the best of the situation. Confidence is low, in part because there are a number of myths circulating around the barriers to trade a no-deal Brexit will create. Some of these can fortunately be quickly dispelled.
Following a no-deal Brexit the movements of goods will cease to be tariff free. Goods that now count as intra-EU supplies will overnight become imports and exports each time they cross into the UK or Europe. Under normal procedures they will need to be declared and cleared through customs. Import VAT will be chargeable on goods brought in from Europe, as it is currently the case for all non-EU imports. Other issues, such as overseas VAT accounting, will also rear their head.
The payment of import VAT and Customs Duty will create an additional administrative cost for businesses, estimated by the government to be between £25-55 per entry. Given the depth of some cross border supply chains, and the slender profit margins many companies operate with, this additional cost shouldn’t be lightly dismissed.
Fortunately, for businesses with an EU supply chain, the government has already publicised some welcome simplifications to try to assist. These include postponed import VAT accounting, as well as transitional simplified import procedures.
Postponed import VAT accounting will mean businesses can self-declare the import VAT due on their VAT return. At the same time they will “recover” the import VAT. For businesses used to intra-EU transactions this will be very similar to the current accounting adjustments they already make on their VAT returns. Customs Duty on the other hand, will be an outright cost that can’t be recovered.
The transitional simplified import arrangements are designed to support businesses which import from the EU and don’t have an import representative such as a freight agent. HMRC has said it will review the arrangements after 3-6 months and give businesses a further 12 months’ notice period before reverting to the current traditional procedures.
UK Businesses can register to be included in the simplified import procedures by obtaining an EORI, or Economic Operator Registration and Identification number, and taking steps to secure a bank guarantee to allow Customs Duty to be deferred. All businesses trading in the UK must obtain an EORI number if they’re to continue trading with the EU post Brexit. This is a relatively simple process and can be done through just one visit to HMRC’s website.
There are also more sophisticated steps that businesses should consider for the medium to long-term trading environment.
One myth doing the rounds is that it’s a requirement to set up a subsidiary company overseas in order to sell goods to EU customers. However, the position is much simpler in reality. If a UK business imports goods into mainland Europe post Brexit, and is the registered ‘importer of record', the liability to register and account for VAT can be done as an overseas business, with no need to set up a subsidiary.
Setting up an overseas subsidiary is a major moment for a business on its journey to success and must be carefully considered. As well as VAT and Customs Duty issues to consider there are other complex tax, transfer pricing and human capital issues associated with having a permanent establishment overseas.
UK transfer pricing rules for example operate to make sure taxpayers don’t enjoy a UK tax advantage through under-reporting UK taxable income, or over-reporting UK tax-deductible expenses arising from related party transactions. Post Brexit, companies thinking of migrating all or part of their UK activities to a European jurisdiction may find that they come under increased transfer pricing scrutiny.
It may well be the right development for your business to have a permanent establishment in the EU to focus on your EU market, but it’s not necessarily the right or the only option.
The thought of overseas VAT accounting can be daunting but we all currently follow a harmonised EU VAT system, so the concepts are already familiar. Many businesses can operate within their current accounting systems by setting up a separate country code to ring fence their VAT accounting for another country.
In addition there are Customs Duty suspension regimes such as Inward Processing relief and Customs Warehousing, which can help a business’s processing and manufacturing goods by preventing a ‘double duty hit.’ There’s also the Authorised Economic Operator certification regime, referred to as the Trusted Trader scheme, may well turn out to be the sweetener that softens that hard border.
For the next few weeks businesses should take stock of the facts and the government’s own preparations to calm those panic moments. Careful preparation and a thorough understanding of the technicalities of international trade will make a major difference to the ability of businesses to cope with the shock of a no-deal Brexit.
If you’d like to contact Alison call 01604 624011 or email email@example.com.