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It’s Brexit time: Down to business

Shelves stripped of food, supply chain disruption, penalties for travelling without permission, restrictions on international trips — for the past six months COVID-19 has played havoc with normal life for UK businesses. 

But the same set of disruptions could be as bad, if not worse, under a no-deal Brexit, which seems increasingly likely as talks between Britain and the EU break down yet again.

For businesses, years of uncertainty over what a post-Brexit trading relationship might look like is coming to a head, and less than 100 days left to the end of the transition period, it is beginning to look a lot like no-deal.

This time, it’s serious

The UK Government has prepared for no-deal before — four times before in fact — ahead of 29 March 2019, 12 April 2019, 31 October 2019 and 31 January 2020.

But this time there is no last-minute reprieve, no extension that can be granted and, more importantly, no political will for delaying further.

“Now a lot of companies are getting back to normal as far as they can but if you’ve not started already it is potentially going to be too late.”
– Andrew Thurston

Coupled with the ongoing challenge of the pandemic, it adds up to a perfect storm for business, says Andrew Thurston, Customs Duty Consultant with MHA MacIntyre Hudson, the UK firm for Baker Tilly International.

“Because it was announced earlier this year that the transition period was finishing the end of December, companies were expected to plan their exit in the summer, but obviously, COVID came along and just wiped out six months of their planning,” he says.

“You had staff who ended up being furloughed because of the virus, so that reduced the capacity of companies to prepare.

“Now a lot of companies are getting back to normal as far as they can but if you’ve not started already it is potentially going to be too late.”

For many European businesses, a no-deal Brexit is seen as more likely than not — so attention is turning to how best to manage cross-border trade without a cross-border deal.

In the UK, however, the historic twists and turns of negotiations mean many businesses still have their hopes pinned on a last minute agreement.

In a recent webinar held with Baker Tilly experts from the UK and Netherlands, for a British business audience, the question was posed ‘how ready are you,’ says Alison Horner, Indirect Tax Partner with MHA.

“We had several hundred people on that webinar and 70 per cent had done no preparation at all,” Horner says.

“I think everybody’s still waiting. The last few times Brexit was put back, and people assume there will be a deal. We know that mid-October is a key point for the EU as they need to get any agreement for a deal ratified at the EU Parliament by the end of October. There is a feeling they have got until the middle of October, and then we’ll see what the position is.”

From a Dutch perspective, optimism for a deal is far lower.

“The Dutch tax authorities already for months have really taken the opinion that there will be a hard Brexit, that there will be no deal for tax purposes — that’s really their strategy. They are informing businesses to apply for example for import VAT deferment licenses in the Netherlands when trading in goods with the UK,” says Marisa Hut, Manager VAT & Customs, Baker Tilly (Netherlands).

“They also are happy to announce that position publicly and say this is what we need to work with, especially as we do not see a deal coming in which the UK stays in the EU for VAT and customs.”

“Unfortunately some people are not preparing and I understand that position because it has been going on for so long, but it can no longer be postponed. This is it.”

Finding certainty in uncertain times

For all the politics, bitterness and competing claims around Brexit — from both sides of the debate — a no-deal Brexit includes a number of certainties.

The first is that the UK would be independent of the EU in trade policy and, as a member of the World Trade Organisation, be able to conclude its own trade deals with other countries.

The second is that independence means the UK is considered a non-EU country for VAT and customs purposes, the free movement of goods between the two trading blocs will no longer apply, and the UK will be subject to different VAT and customs rules than EU countries when seeking to trade with its biggest neighbour.

What will that mean in practice? Paperwork.

Brexit and the supply chain

Consider the case of a small UK business that buys components from local suppliers, manufactures locally and sells a finished product into Europe.

At the simplest level, as an exporter to Europe, they will now need to complete a UK customs declaration for the transport of the finished product and may need to pay import VAT on its arrival.

But if the manufactured product has multiple components, they will also need to understand the impact of Brexit on their supply chain.

If suppliers to the manufacturer get some of their componentry from Europe, they will in turn need to complete import declarations for all imports from the EU, even if they are eligible for what is known as inward processing relief, which can delay or reduce the duties payable on the imports.

The manufacturer and all suppliers in the chain will need to have an Economic Operator Registration and Identification (EORI) number to identify the businesses and record the imports and exports.

They will need to know the Commodity Code, a numerical description of the goods being exported as this determines the duty rate applicable on importation.

Once the goods are correctly classified by code, the manufacturer should then know if an export licence is required, and whether any preferential duty rates can be applied — as well as whether the goods are covered by measures such as anti-dumping duties or tariff quotas.

This should be relatively simple for some manufactured goods but vastly more complicated if the exports are of manufactured food, for example, or any biological product such as plants or seeds.

Get the classification step wrong — or incorrectly calculate the correct value of the goods — and the business can be in breach of the rules under the WTO.

Once the manufacturer has all the information required, they then need to engage a customs broker, agent, or freight forwarder to submit the necessary customs declarations. 

Alternatively, they can self-declare to CHIEF — the mainframe computer known as Customs Handling of Import and Export Freight — which means registering for the National Export System

But CHIEF itself is due to be replaced by a new system known as Customs Declaration Service (CDS), which is due for full release in 2021.  Due to the need for mainland UK’s (GB) obligation to make simplified declarations into Northern Ireland, the development of CDS has been focused on this new requirement.

And if someone in that chain has made a mistake?

The manufacturer may find themselves having to manage the liability depending on the delivery terms, or Incoterms, attached to the import or export deal.

Breaking the process down into stages can help provide some clarity.

Alison Horner says the first step businesses need to be aware of is that those goods currently seen as intra-EU supplies will overnight become imports and exports, and need to be declared and cleared through customs. Goods brought into the UK may require Import VAT to be paid and businesses may also have to deal with overseas VAT accounting.

“It’s on the customs duty side where there’s a real urgency now,” she says.

“The timeframes are tight and businesses need to get these special regimes put in place.”

To offset the immediate impact post January 1, the UK government has put in place a number of measures designed to spread out the changes and there are existing regimes that businesses can use.

A business that has a customs warehouse can delay the need to pay duty or VAT until such time as goods go into free circulation, for example, or avoid it altogether if the goods never enter the market in the UK.

Under this arrangement, if a UK company brings something in from the EU which will then be exported out again, it can remain in either a privately owned or public customs warehouse and not be subject to duty or VAT.

“It’s on the customs duty side where there’s a real urgency now. The timeframes are tight and businesses need to get these special regimes put in place.”
– Alison Horner

Additionally, from 1st January 2021, businesses will be able to use what is known as postponed import VAT accounting to account for import VAT. Rather than paying VAT upfront and recovering it later, they will be able to declare and recover import VAT on the same VAT return, wherever the goods are from in the world.

Horner says these measures should make the end of transition more manageable for many businesses — provided they are on the front foot.

Still, pushing the paperwork off into the future presents its own challenges.

One measure from HM Revenue and Customs will now allow traders “with a good compliance record” to defer import declarations on most goods for up to 6 months.

“Because of COVID, this measure has come into place partly for importers but partly for the freight industry in recognition that they have not been able to train staff to meet the demands of Brexit in the past six months,” Horner says.

“It seems to us that because you need to have the paperwork and figures available anyway, it might be a bit of a false hope to think you can defer it for six months and it will be easier then.

“The delay might also conflict with postponed import VAT accounting, which is a good measure that will deliver a good cashflow benefit for everybody importing.

“But if you are not going to declare everything for six months due to deferred import declarations, you still have to estimate the amount of VAT supplied to that import and then potentially have to amend it down the road.

“It will create additional admin to get this right.”

“They haven’t even started to think about the fact that if their package is sent from the Netherlands to the UK that somebody must do something with it.”
– Marisa Hut

For EU businesses selling to the UK, there are similar concerns, says Marisa Hut.

“Where I see issues is in areas like the ecommerce business, where there are goods sold to consumers and UK is a very interesting market, of course, for EU companies selling goods to consumers to an online shop,” she says. 

“They haven’t even started to think about the fact that if their package is sent from the Netherlands to the UK that somebody must do something with it.

“Right now it’s sent freely, but after January 1, something will need to be done to prepare this for customs. Who do you make responsible? Who is going to pay those costs? Will it be the consumer? Is the consumer prepared to do this? Did you all include all these on your website?

“Things like this are not recognised.”

Cross-border advice can avoid new border trouble

As businesses on both sides of the Channel grapple with the new reality, Baker Tilly experts say they are finding the ability to work with peers across the global accounting network is making some of the issues easier to manage.

Alison Horner says that for UK businesses with extensive trade ties, many get frightened by the complexity or the idea of setting up a separate entity within the EU. 

“On the VAT and the EORI side, they can get flummoxed by thinking they need a subsidiary, and that’s such a big thing, they decide it is too big to look at — too much of an investment, they just don’t know where to begin,” she says.

“But if when they have the conversation with us it can often be far more simple. Marisa can register them for VAT, even act as their fiscal representative, assist with finding some warehousing in the Netherlands and get them a European EORI number and they are set to continue trading.

“The issue isn’t the complexity — it is getting them over being scared about the challenge. We can do this. It just starts with a conversation.”

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Meet the experts

Andrew Thurston

MHA MacIntyre Hudson

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Alison Horner

MHA MacIntyre Hudson

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Marisa Hut

Baker Tilly Netherlands

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