Planning for Brexit

Published by Colin Laidlaw on 26 October 2020

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The UK technically left the EU on 31 January 2020.  It entered into a transition period which ends on 31 December 2020. The deadline for extending the transition has passed.

During our transition we continue to be bound by EU regulations.

Although a deal with the EU for a new free trade agreement (an FTA) remains possible, which will alleviate Duty that may otherwise apply to imports, the Government has asked us to prepare for no-deal.

Whether a deal is still reached or not, there will be exports and imports to declare, which will lead to a considerable change for many businesses, those that are not currently used to exporting or importing goods from outside the EU.

Without a deal (and FTA), the UK will leave with a ‘hard Brexit’ in effect.  There will be Duty tariffs applicable to goods moving into the EU, and separate tariffs for goods arriving into the UK from the EU, these having being published by UK Government.

The Government is directing businesses to what is described as a “straightforward checker tool”. This appears useful, although there is so much to it and click-throughs to further, sometimes complicated, guidance, hence it is difficult to know whether you have covered and understood all that you need to. It also tends to be outward facing, thinking only about a UK established business importing into the UK, or exporting, whereas the commercial reality at present is that many UK businesses move freely and deliver goods to their customers. Businesses really do need to consider their specific circumstances and obtain specialist advice in order to ensure they understand the rules and can trade as freely as possible in 2021.

There are just over two months to go and it seems that we do still have the real possibility of a hard exit.

Whether or not we do reach an FTA with the EU, what we do know is that things will change with regard to VAT and Customs.

What does Brexit mean for me?

The UK will be treated as a third country for VAT and Customs purposes. This means:

Goods arriving into the UK will be imports

VAT and (potentially) Customs Duty will be payable on imports from the EU. You will need an Economic Operators Registration and Identification number (a UK ‘EORI’). In October 2019, in anticipation of a no-deal exit, HMRC provided EORI numbers to as many known importers as possible. If you do intend to import goods into the UK (or to export goods from the UK) and haven’t got a UK EORI number, you should apply for one now. Without an EORI number the goods will not clear Customs.

VAT will be payable on importation

Currently, VAT is payable on the movement of goods from the EU – called ‘acquisitions’ – albeit not at the border. It is processed through the acquirer’s VAT return. VAT on imports (from outside the EU), however, is typically paid on entry to the UK and (where eligible) recovered from HMRC at a later date again via the importer’s VAT return (a C79 document proving the payment of import VAT).

HMRC has confirmed that UK importers of both non-EU and EU imports (as they will become) will benefit from ‘postponed accounting’ from 1 January 2021. The burden of paying VAT will not therefore occur for the majority of cases.

HMRC has also introduced new rules for supplies of goods into the UK. For goods with a value below £135 sellers outside the UK must register for UK VAT and pay the VAT. Online marketplaces will be responsible for collecting and paying this VAT where they facilitate the sale. This new measure includes any packages below £15 which would previously have been excluded under the Low Value Consignment Relief rules (LVCR). This covers all goods sold on a business to business (B2B) or business to consumer (B2C) basis, but where the B2B customer is registered for VAT in the UK and provides its VAT registration number, the supply may be self-accounted for by the customer.

These new rules will not apply to excise goods (e.g. alcohol) or private transactions.

Goods above £135 will be subject to VAT in the normal way, i.e. the importer will pay the VAT, although it is anticipated that the seller will be able to opt to pay the VAT on behalf of the customer if it chooses.

This is very much in line with the EU E-commerce package we have previously reported.

Customs Duty may be payable

The UK is in the Customs Union with the EU at present and as such no Duty is payable on movements of goods between member states. With the UK being a ‘third country’, from 1 January 2021, businesses importing goods from the UK into the EU or vice versa may be required to pay Duty.

It is anticipated that any FTA agreement will include the UK being in a Customs Union with the EU, but this is not guaranteed. In the absence of an FTA the UK would revert to World Trade Organisation tariffs (WTO) which may not always be preferential. Unlike VAT, Customs Duty cannot be recovered from HMRC and will be a cost.

Customs processes will change

This area needs particular attention. As movements of goods to and from the UK will be imports and exports, businesses will need to be prepared for the change in documentation and Customs clearance processes required.

Even if the UK agrees an FTA with the EU and there is no Duty on goods, there will still be a need for Customs import and export declarations to be submitted, which set out for example the correct commodity code and tariff and country of origin of the goods, in order for Duty not to be paid. The requirements are set out in more detail in our March 2020 article, “5 steps to get Brexit ready”.

It is likely you will need the help of an agent to do this and a Customs specialist to ensure you maintain a robust system with appropriate evidence of import/export and so are ready for any HMRC (Customs or VAT) inspection.

Goods leaving the UK will be exports

Goods leaving the UK for the EU will be treated as exports and subject to import VAT and Customs Duty on entry to the EU. Along with the more complex reporting requirements, consideration needs to be given to the effect that this may have on the customer and/or your business’ compliance obligations where the goods arrive (see below).

You may need an establishment in the EU if you are responsible for declaring the import.  You will need to check how your Customs Representative is prepared to act. If the UK is not in a Customs Union with the EU the Duty tariffs could be detrimental.  The classification of the goods will need to be considered in detail along with the origin of the goods for Duty purposes.

Commercial aspects and B2B imports into the EU

Although the need for a UK EORI number to clear goods through UK Customs has been widely publicised by HMRC and they have assisted businesses in obtaining one as previously mentioned, the compliance and commercial requirements businesses may have when moving goods into EU countries have received much less attention.  They are equally important.  Here are some of the issues you should consider:

  • If you are responsible for the import into the EU, say to hold goods in a store pending order, then – depending on any FTA and the UK being in a Customs Union – you may need an EU EORI number as well.
  • Will you need to set up an establishment in an EU country? The Union Customs Code currently requires a supplier (or agent if the agent is prepared to be held jointly liable for any import VAT and Duty due) to be established somewhere in the EU in order for an importer to clear goods through Customs.
  • If your business customer expects you to be the importer into an EU country, you will probably need to register for and account for VAT there.
  • What about pricing of sales?  Might there be additional duty costs that have to be factored in?
  • Have you considered your commercial terms of business and whether contracts with customers are applicable for post Brexit?
  • Will licenses be needed to trade in the EU?
  • If delays in shipment occur, what are your contingency plans?
  • Given the supply chains you have, is there any better structure to minimise cost and disruption?

This is not just about goods

Although Brexit will predominantly affect movements of goods, other VAT related aspects will change and need to be managed.  For example:

  • Overseas VAT refund claims
  • Tour Operators Margin Scheme (TOMS)
  • Supplies of digital services to consumers in the EU (Mini One Stop Shop – MOSS)
  • Simplification rules such as triangulation, call-off stock and the supply and install provisions

Services will largely be unaffected.

The overriding message here is that all businesses are different and need to look at their specific supply chains and issues if they wish to trade successfully with the EU, and internationally in general, in 2021. There will be compliance and clearance obligations, commercial issues and potentially planning that will need to be undertaken to circumvent the issues that are identified.

We have the necessary VAT, Customs Duty and Direct Tax specialists in the UK and within our international Kreston network that can help you navigate through this challenging period.

If you would like to discuss the topics explored in this article, please contact Colin Laidlaw or Rupert Moyle.

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