The U.K. government remains hopeful (at the time of writing) that Parliament, the U.K. legislature, will endorse the so-called Brexit deal that it has agreed with the European Union. However, quite rightly, there must be contingency plans in place for the eventuality that a “no-deal” scenario emerges. Businesses should also have contingency plans in place.
The government has agreed the terms of the U.K.’s exit from the European Union (“EU”) both at cabinet level and with the other 27 member states. However, no such agreement has yet been reached by the U.K. legislature. Leaving aside the political ramifications, while ministers hope to persuade Parliament to accept the terms of the negotiated deal, there is still a very real and distinct possibility that the U.K. could leave the EU on March 29, 2019 without any sort of deal.
In such a scenario, U.K. businesses will face major changes (and challenges) to the way that they do business with the former EU bloc.
If the U.K. legislature were to agree the deal, then, in essence, there would be very little change. The government has announced that a two-year transitional period would follow, whereby all of the existing value-added tax (“VAT”) and customs procedures would remain in situ. Such a transitional period would allow businesses much more time to make arrangements for leaving the EU.
However, if the legislature fails to agree the terms of the deal, and if no further negotiations or deferment are possible, the U.K. will leave the EU with no deal.
Partnership Pack
In the circumstances, it is right that the U.K. government should plan for either contingency, and in anticipation of a “no-deal” scenario HM Revenue & Customs (“HMRC”) has issued a “partnership pack” setting out the potential ramifications of “no-deal” for various sectors in the British economy. The pack sets out the impact that a “no-deal” outcome is likely to have on U.K. businesses in relation to customs, excise and VAT. The pack encourages all businesses to consider the future and to put in place contingency plans in the event of no deal.
In particular, the pack encourages businesses to think about:
- what they will need to adapt in order to comply with any new systems, processes and controls;
- assessing the impact of the increased demand for customs declarations;
- the impact on recruitment and training of any new staff needed to deal with the new demands.
Impact—Customs
The biggest impact is likely to be the requirement for customs entries in relation to the movement of goods from the EU bloc to the U.K., and vice versa. Currently, businesses in the U.K. only have to make such customs declarations if the goods arrive from (imports), or are destined for (exports), non-EU countries. Presently, these customs declarations number around 50 million per year.
Once the U.K. leaves the EU, the existing EU member states will become “third” countries for VAT and customs purposes and customs entries will be required for all movements of goods between those countries and the U.K. It has been estimated that the number of customs declarations post Brexit will increase by (at least) a factor of five (i.e. declarations are likely to exceed 250 million per annum). Whether these estimates are accurate or not, what is clear is that there will be a significant increase.
Many businesses that trade solely within the EU have never needed to consider making customs declarations and have little, if any, expertise in this area. Classifying goods using the customs tariff is a highly technical exercise. The valuation of goods for import and export declarations is equally complex. Throw in the rules of origin (the rules which determine where goods originate), and such matters as trade quotas and export licensing, etc, and businesses with little or no experience of these matters need to make plans now for how they will cope with these additional requirements.
In the majority of cases, it seems likely that businesses will simply appoint import or export agents to handle the movement of goods. However, some businesses may prefer instead to expand their own “in-house” teams. Either way, businesses need to have plans and budgets in place.
Impact—VAT
HMRC has confirmed that, after Brexit, the U.K. will continue to have a VAT system. In a “no-deal” scenario, the government has stated that its aim is to keep the U.K.’s VAT system and VAT procedures as close as possible to what they are now. Presently, VAT is due on the importation of goods from “third” countries and businesses generally settle this import VAT liability on a monthly basis through the use of a deferment account, and reclaim the VAT paid on their next VAT return.
The imposition of import VAT on goods arriving from the remaining EU member states post Brexit will have a significant and detrimental impact on importers’ cash flow.
In recognition of this, HMRC has announced that it intends to introduce a system of postponed accounting, where instead of paying import VAT at the border (or through the deferment account) and then reclaiming through the U.K. VAT return, U.K. businesses will be entitled to “self” account for import VAT through the VAT return. From a cash flow perspective, this will be welcome news for all importers.
Impact—Specific Sectors
The partnership pack published by HMRC sets out more specific details for businesses in various sectors in relation to the impact of a “no-deal “outcome.
In particular, the pack focuses on the specific impact for:
- businesses involved in imports from the EU;
- businesses involved with exports to the EU;
- businesses involved with both import and export with both the EU and the rest of the world;
- businesses just involved with imports and exports to non-EU countries;
- customs agents;
- haulage businesses/freight forwarders;
- ferry or channel tunnel operators moving goods between the U.K. and the EU;
- express courier industry and postal services;
- businesses supplying services to the EU;
- tour operators;
- ports and airports;
- customs warehouses and temporary storage operators; and
- businesses selling duty-suspended excise goods including alcohol, tobacco and fuel.
Changing Procedures
Businesses importing and exporting from and to the EU after Brexit will follow customs procedures that currently apply to trade with the rest of the world. This means that customs entries will be required, and customs controls will apply. Affected businesses will need to register for a U.K. Economic Operator Registration Identification (EORI) and will also need to ensure that they review the International Commercial Terms (INCOTERMS) of trade.
It will be necessary to classify the goods in question using the customs tariff and to ensure that customs entries reflect the correct customs value. These are both specialized areas that should be handled by experienced personnel.
Declaring an incorrect classification or an incorrect value for customs purposes could lead to significant over- or under-payments of customs duty and could also lead to protracted inquiries by HMRC and the potential imposition of financial penalties.
Businesses that currently purchase goods from other member states will be required to import those goods after Brexit. If the customs duty payable is likely to be significant, businesses may wish to consider the implementation of one or more customs procedures such as warehousing or inward processing relief.
Customs agents are likely to see a massive increase in demand for their brokerage services after Brexit, and should consider now whether they will be able to meet this extra demand. Similarly, businesses involved with the movement of freight will face a much greater burden than is currently the case, as declarations for all EU movements of freight will be required, as well as additional safety and security declarations.
In this internet age, the increase in parcel traffic is exponential year-on-year. Parcel carriers and couriers will be required to lodge thousands more customs entries than is currently the case and will need to gear up their systems and controls to cope with this increased demand.
Businesses involved with the supply of digital services to consumers in current member states will no longer be able to use the EU Mini One Stop Shop (“MOSS”) system if there is “no deal.” Affected business will need to register for the non-union MOSS system or, alternatively, register for VAT in the member state where the customer resides.
Similarly, businesses that currently submit claims for VAT paid within the EU will be required to use the existing claims process for non-EU established businesses.
Ports and airports that currently handle freight with Europe will also need to gear-up their systems to cope with the huge increase in customs entries and customs clearances through their systems.
Feedback and Support
HMRC is to be commended for its proactive approach. While the government is still of the view that a deal will be agreed between the U.K. and the EU, it is right that it should anticipate and have contingency plans for a “no-deal” scenario.
HMRC has invited all businesses to provide feedback on a “no-deal” outcome so that, where possible, it can provide support. Businesses that require further clarification, information, guidance or support can contact HMRC directly on euexit.communications@hmrc.gsi.gov.uk.
Planning Points
While parliamentary approval to the deal is pending, U.K. businesses that currently trade with the EU need to plan for a “no-deal” scenario. This means, in particular, taking a close look at whether:
• the business can cope with a significant increase in customs declarations (will this be done in-house or through the appointment of an agent?);
• financial reporting and inventory systems are adequate;
• the business can mitigate the impact of additional customs duties by utilizing customs facilitation measures such as “warehousing” or inward processing relief;
• personnel involved with supply chains are adequately trained.
Karen Robb is a VAT Partner at Grant Thornton UK LLP.
The author may be contacted at: karen.robb@uk.gt.com