Manufacturers involved in European supply chains – whether as suppliers or clients – must act now to mitigate the worst effects of a no-deal Brexit, but it’s not all bad news, says Alison Horner
Whatever the political merits of Brexit may be, a no-deal departure on 31 October will undoubtedly cause a degree of business disruption, especially for firms that import or export goods. But despite the current uncertainty, businesses can still make the best of it by focusing on getting the technical details of international trade right and understanding the rules around VAT and Customs Duty.
It’s still a common myth, for example, that UK companies selling their goods into mainland Europe need to set up an overseas subsidiary company in order to continue selling to EU customers. In reality, the position is much simpler. If a UK business exports goods to 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.
That’s not to say businesses should not have a permanent establishment in the EU to focus on their EU market but it is not a step to be taken lightly. As well as VAT and Duty, there are complex tax, transfer pricing and human capital issues to be considered.
VAT is another major area of concern. While life will undoubtedly get more complex after Brexit, we currently follow a harmonised EU VAT system so the concepts are already familiar to businesses, and the change should be manageable so long as businesses get themselves prepared. For example, many businesses should be able to cope by setting up a separate country code within their existing accounting systems in order to ringfence their VAT obligations on a country-by-country basis. VAT compliance requirements can also be managed by appointing a VAT agent or a fiscal representative.
Further costs will arise once movements of goods cease to be tariff-free, intra-EU supplies and instead become imports and exports each time they cross into the UK or Europe. This has Customs Duty and VAT consequences and may involve an agent clearing the goods and paying the import VAT and Customs Duty. This is an additional administrative cost for businesses which the Government estimates will amount to £26 an entry. While VAT registered business may be able to recover the import VAT paid, Customs Duty is an outright cost and cannot be recovered, which clearly has an impact on profit margins and pricing policies.
These increased costs mean businesses must review the incoterms in their intra-EU contracts to ascertain where the liabilities lie for VAT and Customs Duty payments.
On a more positive note, the Government has announced some very welcome simplifications to try to assist with the transition, namely:
- Postponed import VAT accounting
- Transitional simplified import procedures
The first of these means UK importers will be able to account for import VAT on their VAT return, rather than paying import VAT on or soon after the time the goods arrive at the UK border. For businesses used to intra-EU transactions in goods this is very similar to current arrangements.
The transitional simplified import arrangements aim to support businesses who import from the EU and do not have a freight agent or other import representation. HM Revenue & Customs has said it will review the arrangements after three to six 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 Economic Operator Registration and Identification (EORI) number and taking steps to secure a bank guarantee to allow Customs Duty to be deferred. In the event of a no-deal Brexit, having an EORI number will be an absolute pre-requisite to trading with the remaining 27 states in the EU. Fortunately, this is a relatively simple process and can be done online via HMRC’s website.
That covers the basic steps a business can take now to prepare for the reality of D1ND (as Day 1 No Deal is now being referred to). There are also more sophisticated steps businesses should be considering for the medium to long-term trading environment.
WTO tariffs are undeniably a problem, but by reviewing what their potential worst-case scenario tariff codes may be a business can make well-informed decisions. There are actually many zero-duty rates, particularly in the technology sector, and a large proportion of duty rates fall between one per cent and five per cent.
Finally there are Customs Duty suspension regimes such as Inward Processing relief and Customs Warehousing, which can help a business processing and manufacturing goods which move across borders and prevent a Double Duty hit. In addition, being accredited by the Authorised Economic Operator certification regime, referred to as the Trusted Trader scheme, will be a big help for companies that want ensure the smooth flow of their goods and supplies across borders. It is an onerous certification to achieve but should be considered by businesses seeking to preserve the speed of their supply chain.
Alison Horner is Indirect Tax Partner at chartered accountants MHA MacIntyre Hudson, a top 15 UK accounting firm, offering a full range of compliance and advisory services to entrepreneurial businesses, groups and multinationals with operations in the UK, and now to offshore investment funds. The firm has 12 offices in London, the South East, East Anglia, and the Midlands as well as the Cayman Islands and is a founding member of MHA, a UK wide association of independent accountants and business advisers and the UK independent member of Baker Tilly International.
For more information about the Authorised Economic Operator certification regime, visit: www.macintyrehudson.co.uk/publications/article/authorised-economic-operator-aeo-status