Brexit: moving goods to and from the EU
If you think Christmas is not far away, spare a thought for Brexit which happens just one week later. It has certainly been a year of change for businesses but Brexit is happening and businesses still need to prepare.
You must ensure that you fully understand your obligations when trading goods with the EU, or conversely if you are an EU business wishing to move goods into the UK in 2021.
Let’s deal with one popular misconception straight away. If you are waiting to see if a Free Trade Agreement (FTA) will be agreed before looking at your supply chains and have heard that, if an agreement is reached, it will mean it’s business as usual, you’ll need to think again…
A FTA may mean that Duty will not be charged on imports but it will not avoid the Customs barriers at the ports and airports. There will have to be export and import declarations, come what may, in order to clear goods out of the UK and to clear them into the EU, or vice versa.
A FTA may or may not alleviate the need to establish a company in the EU, which we will explain further below, but it will not avoid the obligation to VAT register where the goods land if you are responsible for the import. For example, a need might arise if:
- You are moving your stock into the EU to an Amazon warehouse if you want your goods to be part of the pan-European stock/supply network. Or:
- You simply want to move your goods from the UK to a storage facility in the EU, or vice versa, in order to ensure that delays and other logistical issues do not get in the way of your B2B or B2C supplies.
You should certainly not assume that your customers will ‘take care of it all’ when it comes to import declarations, any Duty and VAT. We have a number of clients whose customers expect no change in their goods receipt practices; they continue to expect the goods to be delivered to their door. Also, remember that HMRC’s extensive guidelines on preparing for Brexit are focussed on getting goods out of the country, not so much on what happens when they arrive in the EU.
You should not assume that you just need a UK EORI to get your goods into the EU. This will depend on whether the terms you agree with your customer (Incoterms) require you to be the importer, or if you are moving your own goods into the EU prior to customer orders. You may need an EU EORI and VAT registration there as well.
So, what should you be looking at?
We urge you to check the specific supply chains, including:
a. Contracts – terms with customers
b. Incoterms – who is responsible for what in getting the goods to the customer and who is paying any duties and VAT
c. If you are the importer is there an obligation to register for VAT where the goods are imported
d. Logistics and Customs clearance – getting an agent on board and establishing how the agent will act for you, e.g.:
a. As the declarant for the import declaration – in which case it will be jointly liable for Duty and VAT debts. It will be an indirect Customs Representative acting in its own name. What will the additional cost of that be? Or:
b. Pure agent – an agent may well not be prepared to be chased for debts, or the cost may be prohibitive, in which case it would act simply as a direct Customs Representative – completing import declarations in your business’s name, in which case you will need to be “established” in the EU (unless an FTA confirms otherwise).
Do I need an ‘establishment’ in an EU country?
In order to clear goods through Customs there must be a “declarant” to complete a declaration. This is the person or entity responsible for the import (the importer or “importer of record”).
EU law covering Customs procedures (the Union Customs Code “UCC”), says that the declarant must be established in the EU, at least where there is regularity of imports.
Establishment means a registered office, or HQ, or a permanent business establishment where there is some form of human and technical resource/ presence.
Therefore, if an entity is not established in the EU it cannot be the declarant. It can appoint a Customs Representative (agent) to handle the import declaration, but the UCC says that where the importer is not established in the UK the agent must act for the importer, i.e. in its own name, declaring the imports. Hence the agent becomes the declarant/importer of record. This would mean that it becomes jointly liable for the Customs (Duty and VAT) debts.
An agent may not wish to act in its own name if the importer is based outside the EU because whilst there is joint liability with the supplier the authorities may pursue the agent first, it being easier to pursue as it is based in the EU. If it is prepared to act in its own name there would likely be a premium for acting effectively as a fiscal customs representative. It may, therefore, be that you will have to make the declarations in your business’s name, meaning that you would need to be established in the EU.
What are the direct tax implications of setting up an establishment?
Before setting up an establishment in the EU it will be important to understand the direct tax implications. The principal question is whether to set up as a subsidiary or as a branch. Issues to consider include:
- The overseas tax rate and whether there is a difference between the rates applied to a subsidiary and a branch.
- The tax implications of remitting profits back to the UK, specifically whether there is a branch remittance tax or dividend withholding tax under the relevant double tax treaty.
- The level of minimum capital that may be required.
- The level and nature of activity that will be undertaken in the EU territory.
Assuming that a subsidiary is centrally managed and controlled outside of the UK, then it should only be subject to tax in the EU jurisdiction unless specific anti-avoidance provisions apply (e.g. transfer pricing, CFC rules or the diverted profits tax). Further any dividends received by the UK parent from its EU subsidiary should be exempt from corporation tax.
The profits of a branch, however, will be taxed by the UK company with foreign tax credit available for any foreign tax paid on those profits (although it is possible to make a branch election to exempt profits and losses from UK tax). Therefore, where the foreign taxes paid on the branch profits are less than the UK tax that would be assessable, i.e. 19% of the chargeable profits, there would be incremental UK tax to remove any benefit from the lower tax. However, where the foreign taxes paid on the branch profits are greater than the UK tax that would be assessable, then foreign tax relief should offset the UK tax in full. A potential advantage of a branch over a subsidiary is that any losses of the branch can be offset against profits of the company.
Whether to choose a subsidiary or a branch will depend on a variety of factors and should be assessed on a case by case basis.
So as the first Christmas adverts start to appear, make sure you take action now to ensure your business is Brexit ready.
If you would like to discuss the topics explored in this article, please contact Laurence Parry (for direct tax), or Rupert Moyle or Colin Laidlaw (for VAT and Duty).
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Rupert Moyle BA (Hons)
- Partner and Head of VAT and Duty
- +44 (0)330 124 1399
- Email Rupert[email protected]
Colin Laidlaw CTA AIIT
- VAT Tax Director - Technical Specialist
- +44 (0)330 124 1399
- Email Colin[email protected]
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