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Daily Tax Report: International

INSIGHT: Brexit—Post Transition Developments and Repercussions

July 30, 2020, 7:01 AM

It is in no doubt and a huge understatement to state that the changes in the U.K. after January 2021 will be profound.

Irrespective of whether a trade deal is struck before November 2020 (the last realistic European Parliament plenary session at which a trade deal could be put before all the EU members) or beyond, businesses will be faced with new documentary requirements, new financial costs in respect of applicable tariffs and customs agent charges, and new obligations with regards to registering for value-added tax (VAT) and EORI (Economic Operators Registration and Identification) numbers in various EU jurisdictions: all applicable if they wish to retain their existing business and supply chain models.

The recent release of the U.K.’s Border Operating Model and the EU’s Guidance Note on the withdrawal of the U.K. from the EU have brought into sharp focus the many stark realities of the U.K.’s exit. Among the swathes of text stating that both jurisdictions will not recognize each other’s various customs easement and simplifications are several important developments that will affect all industries and sectors.

Many businesses, especially in retail and manufacturing, ahead of the last Brexit deadline wisely increased their stocks of goods and raw materials to ensure uninterrupted supply chains for them and their customers. They invested time, money and effort to “be prepared,” only to be “stood down” at the 11th hour. Understandably, many are unwilling or, due to recent economic developments, unable to, repeat these types of preparations—especially in areas of business such as fashion, where items are subject to other seasonal factors.

However, planning on future Incoterms, understanding how to use the available duty suspension regimes (including the new Postponed VAT Accounting) and reviewing commodity codes—which we will cover later—may help with their refreshed preparations for December 31, 2020. These steps may not entirely solve current issues, but they may help with future cash flow and allow businesses to remain competitive in the global marketplace.

Developments for Importers—a “Soft Landing”?

As we know, heated negotiations are currently taking place to try and hammer out—even in principle—the template of a trade agreement. Even in the event of success with the EU, from January 1, 2021 the U.K. government will replace the EU’s Common External Tariff with its own U.K. Global Tariff (UKGT). This UKGT will cover all movements to the U.K. from around the globe. Obviously, the tariff can be subject to amendments as trade deals are struck, but the current intra-EU importers will potentially be faced with new tariffs depending on the type of goods they import from the EU bloc.

However, it is important to note that even with a free trade agreement not all goods will be subject to a blanket zero-rate tariff. Certain preferences and annexes to the Schedule of Tariffs will exclude selected items. Further, the UKGT aims to simplify, remove and clarify the rates on many goods, and helpfully sets zero rates of duty on approximately 60% of goods imported into the U.K.—not just from the EU but from around the globe.

The government recently released its Border Operating Model which consists of over 200 pages of plans and general guidance on its phased approach to the new EU–GB border arrangement.

The overarching point here is that next year, for importers of non-controlled (referred to as “standard goods”) and controlled goods (such as alcohol, tobacco and other controlled items) there will be full customs controls on goods entering Great Britain.

This will mean customs declarations will have to be made either by the company itself or via their shipping/freight agent or customs broker. Regardless of whether duty is due on the goods being imported, companies will have a legal obligation to ensure that the documents they submit, the procedures they undertake, and the records they keep meet certain standards. These obligations can be onerous and, in most circumstances—depending on a set of strict rules covering the type of “representation” upon which the agent acts on behalf of the company—the onus will always fall on the business, regardless of whether their agent submitted documents on their behalf.

However, the government has recognized the importance of a “soft landing” for British business, perhaps trying to make it even softer for the whole of U.K. business if we include Northern Ireland. So, as part of a three-stage approach, from January 1, 2021, the government states that businesses which import standard goods to Great Britain need only to prepare for basic customs requirements, such as keeping robust records of the imported goods and deferring any applicable duty for six months. After which, full customs entries will need to be submitted and the outstanding import duty paid.

However, all is not what it seems with this enlightened approach. The documentary and duty deferment period is based on the Entry into Declarant’s Records (EIDR) process of simplified declarations taken from an existing customs regime called Customs Freight Simplified Procedures (CFSP). Businesses must also have their own or access to a Duty Deferment Account to benefit. Therefore, pre-authorization—or a commitment to gain full CFSP authorization—to use this customs procedure and take advantage of Stage 1 must be obtained. CFSP, due to its benefits, naturally requires a detailed application and a demanding authorization process to ensure a company’s suitability and to confirm that the business is at a low risk of defaulting on their duty obligations. Thus, it is far from a given that all companies will want to or be able to achieve the required standards. Helpfully, some shipping agents are authorized to use CFSP and can allow businesses to use their authorization—but at a cost.

Therefore, the majority of businesses will be faced with making customs declarations and paying customs duty from day one and will be unable to fully benefit from Stage 1 of the Border Operating Model.

Inversely, if HM Revenue & Customs (HMRC) were to allow unauthorized businesses to simply import goods into the U.K. with no confirmatory customs documentation or duty payments due for six months, the scope for fraud and revenue loss would be mind-boggling.

As part of Stage 2, from April 1, 2021 all goods originating from animals such as meat, milk, eggs or honey, and also all regulated plants and plant products, will require a pre-notification to the U.K.’s border control agency. The relevant health documentation will also need to be maintained and will become subject to full customs formalities.

Lastly, in Stage 3, from July 1, 2021, the U.K. will revert to its “core” import model. Businesses will be required to make declarations on all imports from the EU at the point of importation and pay the relevant tariffs. Full safety and security declarations will also be required.

Potentially Difficult EORI/VAT Arrangements

As we know, import VAT becomes due at the point of importation into the U.K. and into the EU on certain goods from “third countries,” although some goods may be exempt or charge a lower VAT rate. Currently in the U.K., import VAT is paid to the fiscal authorities on the customs value of the goods imported and then subsequently reclaimed with the next VAT return via a C79 certificate which is issued by HMRC.

However, problems arise when businesses import to the U.K. from the EU, and vice versa, and use themselves as the “declarant” (sometimes colloquially and confusingly referred to as the “Importer of Record”): this is as opposed to importing or exporting to an unrelated business or distributor. In the vast majority of these cases, most businesses will require an EORI reference issued in the appropriate jurisdiction, or they will have to use a properly authorized indirect tax representative. This EORI will demonstrate to the local tax authorities that the business is authorized to carry out international trade. It also allows the relevant tax authority to identify a specific entity should they need to chase any outstanding duty or import VAT. A business may also have to be VAT registered in the country of arrival or departure, depending on the agreed shipping terms.

Although obtaining a U.K. EORI number for both U.K. and overseas can be a very straightforward process, complications arise when we consider the legal requirements placed on businesses in the EU jurisdictions to be allowed to obtain EORI numbers in those countries. The recent EU Guidance Note states that under Article 9 (1) and (2) of the Union Customs Code, U.K. businesses importing goods into the EU must obtain a valid EU EORI. Also, those where there is no permanent establishment may have to obtain an EU EORI and appoint an indirect representative to handle the importation and secure any import taxes.

Unfortunately, the parameters for obtaining an EORI in some EU jurisdictions appear more complex and involved, and may result in the requirement for a U.K. business to create a permanent or fixed establishment and use a costly fiscal representative to qualify for an EORI. The costs of creating such an entity can be thousands of euros and may result in other domestic tax liabilities and obligations.

Another option of the EU EORI conundrum is to use an agent acting as an indirect representative (sometimes referred to as a “limited fiscal representative”—in the Netherlands) to declare goods on a non-registered entity’s behalf. This is a usual option but because the agent can be jointly and severally liable for any duty irregularities the cost of using this option can be high.

Initiatives and Ideas

Businesses could make more use of customs warehouses (colloquially sometimes still called “bonds”) both in the U.K. and in the EU. In this customs regime, import tariffs such as duty and import VAT are suspended until the goods leave the warehouse and are declared into free circulation (released for sale). This enables consignment stock to be held in bulk to meet demand without incurring import duty costs. This can be very beneficial, but it also has its limitations when goods are seasonal or subject to particular fashions. However, goods can be removed—retaining their suspensive status—and moved to other customs warehouses to meet regional fluctuations, changing fashions, and market demands elsewhere.

The U.K. government has recently concluded a review into free ports and free zones. These could almost be described as huge geographical warehouses. Processing work and assembly can be carried out in these zones and during this period the goods remain in duty suspension. The government hopes that these free ports will attract investment and jobs to certain regions and create global enterprise hubs. However, free ports are at their most effective when movements are between high and low tariff jurisdictions; as the U.K. is aiming for a low tariff policy within the international trade environment their ultimate benefit is clearly a subject of debate.

The government has also announced the development of a new Goods Vehicle Movement Service IT system and a Smart Freight System. Unfortunately, the new systems are not yet online, and it is hoped that they will link in with the customs entry systems such as Customs Declaration Service (CDS) and Customs Handling Import Export Freight (CHIEF) to bring together an all-encompassing goods movement system. However, what is clear is that business, carriers and even drivers will have to be fully au fait with the documentary and customs requirements, hold the correct documentation, and have the correct movement reference numbers, if they are to be allowed to proceed unhindered through the ports.

What is Already Available

Over the last few decades the EU has developed many useful “third country” duty suspensive regimes and reliefs, and thankfully the U.K. is committed to retaining them. The regimes such as Inward Processing, Outward Processing Relief and Temporary Admission are exceptionally useful and deliver a real-time cash-flow benefit if used sensibly by all retail and manufacturing businesses. What is most welcome news is that in the Border Operating Model it is stated that the financial guarantees to operate these regimes (Comprehensive Customs Guarantees, CCGs) will be waived. This will make their operation even more cost-effective for businesses which hold these types of approvals. These procedures should be closely considered by both importers and exporters.

Exports to the EU

We discussed above the requirements which an entity may face if it wants to buy or sell goods across the EU and U.K., and the need for relevant EORI numbers.

However, it is very unlikely that the EU will reciprocate and follow the U.K.’s model and allow a phased approach from January 1, 2021. Businesses will be faced with submitting full export declarations in the U.K. and rendering import entries in the EU and paying the relevant duty and import VAT at the frontier.

U.K. businesses will be faced with rigorous labeling requirements such as CE and REACH (for chemicals), proof of origin, and possibly the extension of export and import licensing. However, as many U.K. retailers and manufacturers are already familiar with and adhere to these regulations—especially CE and origin—hopefully the impact will be minimal.

Often overlooked are shipping terms (or Incoterms), as these can confer benefits and restrictions on buyers and sellers. Incoterms are a set of international trading terms issued by the International Chamber of Commerce (ICC). They define the responsibilities of sellers and buyers of goods in international transactions. The agreed Incoterms rule clarifies the customs tasks, costs, and risks to be borne by the buyer and seller in respect of a transaction. However, they have no real weight in customs law.

It is wise to consider Incoterms very carefully; although granted some sellers and buyers may be forced to accept a potentially unfavorable Incoterm that weighs heavily upon them. For example, a large car manufacturer in Germany may insist that its smaller component U.K. supplier company ship their goods to them as Delivered Duty Paid (DDP): hence, the smaller U.K. supplier must cover all costs, undertake all customs formalities and pay all import taxes right up to the door of the German car factory. This may mean that the U.K. supplier may have to set up an entity in Germany to legitimately be the “declarant of record” or may be faced with using a local authorized agent under “indirect representation” to import the goods on their behalf. Likewise, a garment retailer may be faced with the same problem when supplying a large retail or merchandising group.

At the other extreme, a small U.K. bespoke glove maker and retailer may have to buy its twine or leather or stock from an EU wholesaler on an Ex Works (EXW) basis. In this case the glove maker will have to take responsibility for all costs including transport, insurance, export declarations, the subsequent import declarations and import taxes from the floor of the factory of the leather wholesaler.

Therefore, getting the right Incoterms to match a transaction can potentially avoid unnecessary VAT and EORI registrations and speed up the sales process.

As we mentioned above, Rules of Origin (ROO) will become exceptionally important . Many goods qualify for preferences or endure embargoes or quotas. These measures are set by countries to protect certain industries and promote trade in others. ROO indicate to a fiscal authority whether the goods should be subject to a preferential duty rate or subject to a more punitive rate, or worse still a quota or embargo.

Businesses will have to ensure that their goods are properly documented and have in place the correct origin documentation, even if they are subject to additional processes in different countries along their journey. If there is any doubt, the importing jurisdiction may impose a higher rate of duty or refuse entry of the goods completely. ROO, preference and quotas are very prevalent in the clothing and retail sectors, but also used in the technology and general manufacturing sectors such as tires, machinery and electronics.

The EU is concerned that any agreement the U.K. strikes with other nations does not mean that its quality and standards are undermined by goods entering the EU via the U.K., having been incorrectly categorized as “U.K. origin.”

Going forward, both EU and U.K. businesses may have to obtain Certificates of Origin to prove the origin of their goods if there is any doubt or the position and provenance of the goods is unclear.

Conclusion

Together with increasing international customs and trading requirements, businesses can find some solace. Postponed VAT Accounting will be introduced in the U.K., meaning that companies’ cash flow will be greatly improved. Import VAT that was once payable at the frontier will now only need to be recorded and reclaimed on the next domestic VAT return.

However, existing VAT simplifications such as triangulation will cease, and this may lead to an increase in EU VAT registration requirements.

Often overlooked is customs valuation, especially between related entities. Even if goods do not attract a positive rate of duty the value for customs purposes must be considered “fair and accurate” by the fiscal authorities. Problems arise with related entities trading with each other across the EU and U.K. They must begin to ensure that their inter-company pricing policy is robust enough to rebut any insinuations that the transaction value is artificial or contrived.

The U.K.’s new membership of the Common Transit Convention (CTC) is also welcome and will allow movements of goods around the EU without the need for several cumbersome customs documents.

Finally, businesses currently involved in trade outside the EU will need to be familiar with the new and existing requirements, but they are likely at be more at ease with the coming changes. However, the estimated 145,000 (VAT registered) businesses that have only traded with the EU will need to look carefully at their systems and processes, to take advantage where they can of new and established procedures, and if they are in doubt they should seek guidance from professional bodies, agents and professional advisers.

Simon Sutcliffe is a Partner with Blick Rothenberg.

The author may be contacted at: simon.sutcliffe@blickrothenberg.com

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

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