As Parliament readies itself for the pending vote on The UK's Brexit agreement with the European Union (EU) and preparations for a ‘no-deal’ scenario get into high gear, the potential of The UK leaving the EU and losing the benefits of its membership are starting to feel like a real possibility. Indeed, if the parties fail to ratify the Withdrawal Agreement there will be no transition period, and as of 11pm on March 29, 2019 The UK will exit the EU and all benefits and EU laws will cease to apply to its shores.
Under this ‘no-deal’ scenario, the impact on businesses in the United Kingdom (UK) will be significant, especially around the inevitable changes to current EU agreements and laws for VAT and customs duties. Whilst preparation can help businesses to better manage these changes, the uncertainty that hangs over Brexit is still leading some small and medium size businesses to adopt a ‘wait and see’ approach. Not all businesses are taking some of the basic steps to get ready for Brexit – deal or no deal – and this gamble is very worrying.
At this time, scenario planning should be a top priority. Armed with the knowledge of what the UK’s current membership provides and with an appreciation of some of the key operational areas that are likely to be impacted, all businesses can take some simple and low cost steps towards preparing for a potential exit from the EU.
Let’s take customs duties under a no-deal scenario as an example. Under the current rules, when a business purchases goods or moves its own goods from an EU country into the UK, those goods are already in ‘free circulation’, and as such, Customs Duty is not applicable and the UK can benefit from intra-community simplification measures. However, in a no-deal environment, goods purchased from EU suppliers will be subject to the same requirements as current third country imports of goods, including the payment of import VAT and customs duty.
Under World Trade Organisation (WTO) rules, the principle of Most-Favoured-Nation (MFN) treatment will mean that the same rate of duty on the same goods must be charged to all WTO members equally. This will create a direct cost on the importing business for dutiable goods, since customs duty is not recoverable.
The potential change in status of the UK to a third country with no customs arrangement in place, could therefore bring significant challenges for many industries that currently feel they will be relatively unaffected by Brexit. For example, many businesses that operate in the oil and gas sector regularly bring goods into the UK from the EU as part of their ongoing operations. This will include ‘own goods’, which are frequently moved between countries. The change in status has the potential to generate additional, non-recoverable costs in the supply chain, potentially impacting pricing margins and raising questions as to which party will bear this cost.
Understanding your responsibilities as part of this potential change of profile will be key, and with the identification of UK/EU supply chains, businesses should consider their commercial and contractual position and explore ways to manage the resulting impact.
In addition to importing, many UK businesses are involved with exporting goods out of the UK, both to the EU directly and through the EU to reach other markets. Under the current intra-EU VAT dispatch simplification rules, sales to EU customers (be they business or consumer) will be treated as exports. This means that export formalities will have to be complied with post-Brexit, and a corresponding import will be required in the EU member state of the customer. This will potentially create an additional Customs Duty cost for the importer, which could make it less attractive for EU customers to engage with UK businesses.
In a similar vein to imports from the EU, businesses will need to consider where title transfers and responsibilities for reporting the import rests. Where the exporter also acts as importer (e.g. in the country of delivery), a local VAT registration obligation may arise. However, while a UK business can typically, under the current rules, register for VAT directly in other EU countries, if the UK is no longer part of the EU arrangements a local fiscal and customs representative may be required.
This new process for exports has the potential to add extra costs and administrative burdens on the importer and it will take time to appoint representatives where they are required. To prepare for this scenario, an understanding of where you act as importer, and the associated incoterms, will be crucial in understanding your potential obligations post-Brexit so you can ensure your business remains efficient and competitive.
Under a no-deal scenario, additional checks may also be carried out on UK goods entering the EU. Additional administration costs, which are likely to be applied on the clearance of goods through the UK/EU customs border, as well as delays in goods crossing the border, should be built into any scenario planning.
To prepare for, and better manage this process, businesses may want to consider engaging the services of a customs broker, freight forwarder or logistics provider. In addition, applying for Authorised Economic Operator status to access customs simplifications could also help to ease the administration burden and counter possible delays. Again, this will likely result in extra costs being incurred, but planning for this and investing in the right structures for your business activities can far outweigh the potential costs of lost revenues and time trying to overcome these customs challenges.
Whatever the outcome of Brexit, we will inevitably see some changes to the reporting obligations of businesses that operate across UK and EU borders. Unless a transitional period is agreed, businesses will need to reflect these changes from the outset, and with a no-deal outcome momentum real possibility, planning for this scenario creates an ideal opportunity to review and fine tune your business operations and help to ensure you remain one step ahead of your competitors.