Jan. 31, 2022 will mark the anniversary of the end of the Brexit withdrawal period and the U.K.’s exit from the EU. The last 12 months have resulted in some significant upheaval, particularly for organizations trading in goods—which is the focus of this article—with changed value-added tax (VAT) and customs duty compliance obligations arising for many businesses.
From an indirect tax perspective, businesses have had to adapt to new import and export processes, handling customs duty obligations, the loss of EU VAT simplifications, and new requirements in order to move goods between Great Britain and Northern Ireland.
It is hoped that 2022 will bring further stability; however, more changes are anticipated, and organizations must continue to prepare for these.
Changes in 2021
The immediate indirect tax changes resulting from Brexit created “business critical” risks for organizations to deal with, both in terms of minimizing the impact on their margins as well as ensuring their ability to continue trading with customers and suppliers.
For the first few months of 2021, those organizations largely reacted to the new Brexit rules, both from a technical perspective, as well as from a practical one. There were also a number of “myths” about the U.K./EU trade deal which resulted in considerable friction.
Some significant changes were:
- There was the requirement for businesses to submit import and export declarations when goods cross the U.K./EU border, a new procedure for many.
- Despite political suggestions to the contrary, the U.K./EU trade deal was not completely tariff free. Zero tariffs only apply to goods which originate in the U.K. or EU. Goods which originate from another country may not fall within the parameters of the U.K.–EU trade deal, meaning they are potentially subject to positive rate duty when imported.
- A significant change for U.K. businesses selling goods to customers in the EU, and vice versa, was the potential to have to maintain overseas VAT registrations in the destination country or countries, particularly in situations where the supplier acts as “importer of record” into the destination country. Maintaining overseas VAT registrations is not always straightforward, even when the preparation of VAT returns is outsourced.
- The Northern Ireland Protocol introduced new administrative processes in order for goods to move between Great Britain and Northern Ireland and many organizations reported difficulties in understanding the new requirements.
Recognizing that there was an increase in the number of imports and that many businesses were inexperienced in the administrative requirements, the U.K. government introduced a number of easements (regulatory and tax) to facilitate the flow of goods into the country.
While the easements were intended to support businesses, some added to the uncertainty created, by changing compliance requirements. Most recently, the goalposts have once again been moved on the introduction of checks and controls on imports of agri-food products from the EU, with business struggling to keep track of the various changing rules.
Another example is delayed customs duty declarations. Businesses have had the option to delay their customs declarations for goods imported into the U.K. from the EU since Jan. 1, 2021. This easement will end on Dec. 31, 2021, which means that goods could be stopped or turned back from the port if a customs declaration is not submitted at the point of import into the U.K.
For businesses that took advantage of the delayed declaration easement, there is a period of 175 days for the importer to follow up with a detailed supplementary declaration; if this is not done, then the goods are deemed to have not been legally declared, and could be subject to forfeiture and penalties.
Experience has also shown that some businesses were not aware that submission of their declarations had been delayed, increasing the risk of possible compliance failings.
Recovery of Import VAT
Another area where there were compliance difficulties in 2021 was the recovery of import VAT. The U.K. tax authority HM Revenue & Customs (HMRC) introduced Postponed Import VAT Accounting (PIVA) from Jan. 1, 2021, which allows importers to postpone the payment of import VAT to their VAT return so that they pay and often reclaim the import VAT at the same time, eliminating the cash flow disadvantage of paying import VAT at the frontier.
Where PIVA is used, organizations will need to ensure that the GB VAT number and GB Economic Operators Registration and Identification number (EORI) are linked. When this is not the case, VAT becomes payable before the goods are released, which can lead to delays.
While using PIVA has a positive impact on cash flow, a decision has to be made for each import as to whether it will be used. This is resulting in importers having a mix of some imports where PIVA is applied, and others using the “old” system of paying the import VAT at the time of entry and then subsequently recovering it via a VAT return when a C79 certificate is issued by HMRC.
This dual system causes confusion for businesses, and so has the need to have an account separate from the HMRC Gateway to access the online PIVA statements. It is also not uncommon for businesses to have imported goods and to have “missing” import VAT, either because they deferred the declaration, they did not use PIVA (and so should receive a C79 certificate) or the transaction is missing from the PIVA statement for another reason.
So—what changes may take place in 2022?
The highest profile area is in relation to the Northern Ireland Protocol. The U.K.–EU renegotiations over the terms of the arrangement have been widely reported, and there remains the possibility that the U.K. may trigger Article 16 of the Northern Ireland Protocol, which allows either party to suspend part or all of the protocol if they conclude that its operation leads to serious “economic, societal or environmental difficulties” that are liable to persist.
The potential implications of triggering Article 16 could extend well beyond the limited impact of the article itself. Along with additional actions the U.K. government may take with it, this could lead to a snowball effect and a rapid further deterioration in U.K.–EU relations, with the EU possibly taking reactive measures including suspending or terminating the EU-U.K. Trade and Cooperation Agreement, applying tariffs or requiring additional checks or licenses on imports from the U.K., or ceasing cooperation in other areas such as on data adequacy, aviation and research programs.
Given that businesses desire stability to plan and meet their compliance obligations, such uncertainty makes doing so all the more difficult.
Freeports are part of the U.K. government’s “Leveling Up” strategy, and the spring budget 2021 announced the introduction of freeports in eight areas: East Midlands Airport, Felixstowe and Harwich, Humber, Liverpool, Plymouth, Solent, Thames and Teesside. It is intended that a further four areas will be identified in England, as well as in Scotland, Wales and Northern Ireland.
Much work has been taking place behind the scenes to create the legal and operational framework for the freeports to open. There will be tax incentives for businesses to relocate to the freeports, and they are expected to support U.K. manufacturers who import materials to create finished goods that are exported around the world. Further details on the specific tax fiscal regimes applicable and the opening of freeports in 2022 is expected.
It should be noted, though, that many of the likely customs-related benefits of a freeport area are already available elsewhere, through existing duty suspension (customs warehousing) or relief approvals. A freeport area may offer some simplifications not available under conventional customs warehousing or inward processing, but these have not yet been defined.
So, setting up in a freeport may not necessarily be the most appropriate action for businesses to take, given the likely large capital costs of relocating/opening new premises.
As noted above, the ability of businesses to delay making import declarations will end. This will result in more declarations being made at the time of entry, so businesses should ensure there is a good communication flow between them and their customs agents.
As the U.K. expands its range of trade agreements with other countries, complex rules of origin will play their part in determining the eligibility of goods for preferential duty rates. The U.K. continues to pursue a trade agreement with the U.S.; however, the continuation of retaliatory duties on U.K. steel products shipped to the U.S. is an indication that the U.K.’s negotiating power may be less effective than it once was.
It is hoped that 2022 will be a year with more stability than 2021, with fewer changes to the VAT and customs duty rules applying to imports and exports.
However, there are several areas where further changes can be expected, including trade with Northern Ireland, the end of delayed customs declarations and the opening of freeports in the U.K. Organizations will need to consider any impact on their operations.
Some organizations have already been strategically assessing whether their post-Brexit supply chains are optimized, which may lead to further changes for some businesses, particularly as organizations also reflect on whether any particular changes are needed to their arrangements as a result of wider supply chain considerations.
The initial impact of Brexit in 2021 had also been cushioned to a certain extent by a set of easements which prioritized the flow of goods above collection of revenue. For those U.K. businesses that considered the impact to be minimal, 2022 may challenge the strength of their preparedness, as the U.K.’s priorities migrate back towards revenue collection and customs compliance.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Robert Marchant is VAT & Customs Partner at national audit, tax, advisory and risk firm Crowe.
The author may be contacted at: email@example.com