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Sue Rathmell MHA MacIntyre Hudson, U.K.
Sue Rathmell, VAT Director, MHA MacIntyre Hudson, U.K.
The government has stated that the U.K. will leave the European Union (“EU”) customs union at the end of the transitional period, which will start on March 29, 2019. What does it mean for U.K. businesses and what should they be doing to prepare?
Currently, goods coming from a non-EU country are customs cleared with the appropriate amount of duty paid in whichever country they first enter within the EU. The goods can subsequently move freely anywhere within the EU, without further payment of duty and without being stopped at borders between EU countries. The EU customs union applies the same single set of tariffs, which are the duty rates payable on the goods, the amount of which is dependent on the country of origin of the goods and the nature of the goods themselves. The EU has a series of agreements with some non-EU countries that govern the rates payable and are usually preferential.
If the U.K. were to stay in the EU customs union then we would have to apply the EU tariff of rates and we would not be able to negotiate our own agreements with third party countries. If the U.K. leaves the customs union, as the government has insisted will be the case, then the U.K. can negotiate deals with all other countries including the EU itself. If no special agreements are made then the U.K. falls back on the rates of the World Trade Organization (“WTO”), which regulates international trade and which has negotiated and signed agreements relating to tariffs and trade with the aim of ensuring that trade flows smoothly.
While the U.K. will leave the EU on March 29, 2019, it will then begin a transitional period which Prime Minister Theresa May has suggested will be around two years. The EU's chief negotiator, Michel Barnier, has said that a transitional period should end on December 31, 2020. Other commentators have suggested that a five-year period is more realistic. Whatever the length agreed in the end, during the transitional period the U.K. will continue to be part of the customs union.
For U.K. businesses, depending on the final detail, remaining part of the customs union should mean that little changes from the point of view of bringing goods into the U.K. from other EU countries or from non-EU countries. The U.K. would continue to apply the EU tariff to goods coming from outside the EU, and there would continue to be free movement of goods from the UK to other EU countries,and vice versa. During the transitional period, the U.K. will hopefully be making trade agreements with the EU and with non-EU countries, and these trade agreements will govern the duty rates to be paid after the transitional period comes to an end.
There is therefore the likelihood of some breathing space for U.K. businesses during the transitional period. However, with the prospect of fairly major changes after the transitional period, businesses should be preparing for future trade outside the customs union. When the transitional period comes to an end, the U.K. will cease to be part of the EU customs union: from this time onwards, goods moving into or out of the U.K. will be subject to customs declarations, customs checks and duty rates negotiated with the EU and with non-EU countries. If there are no specific trade agreements, then the WTO's tariffs will apply.
Assuming that the U.K. will enter the transitional period as currently proposed, U.K. businesses have between two–three years to get ready for life outside of the EU. There are plenty of things they can do during this time to reduce costs, avoid delays and ensure a problem-free transition to trading outside the EU.
As a first step, businesses should review their supply chain and map out the source of all their raw materials or goods, reviewing processes and the movements of goods which are currently involved in bringing their product or service to the market. Once they have this information they will be able to identify where there will be changes post Brexit. Most will buy goods from various countries and this process will identify where the supply chain is vulnerable and where they will be paying more.
Following this, businesses should consider whether they are able to pass the additional costs on to customers, or alternatively whether they need to make changes to their supply chains. Can they renegotiate contracts or use existing break clauses if they wish to purchase elsewhere? Planning ahead is particularly vital when entering into contracts that will be running in 2021.
From a logistics point of view, is your business likely to suffer delays along the supply chain because there may be bottlenecks at ports for example? Do you need to have contingency plans in place including holding more stock, using alternative suppliers or alternative supply routes, or does your business need more warehouse space? Businesses should assess transportation requirements to identify any necessary changes in advance and ensure they have everything in place before the transitional period ends.
Businesses must also determine whether they are one of the estimated 130,000 businesses which will be making customs declarations for the first time, as they will need to think about registering for the National Export System; this will allow them to submit electronic export declarations or use a freight forwarder to make the declaration on their behalf. There will be additional costs and additional time needed that should be factored into preparations.
The Customs Declaration Service (“CDS”) is also due to replace CHIEF, the existing electronic system for handling import and export declarations in a phased launch from August 2018, and businesses will need to be ready to use the system. The CDS will require the capture of more data than CHIEF did and businesses will need to ensure that their computer systems can generate the necessary data to be able to interact with the CDS.
Following the end of the transitional period, all goods imported into the U.K. from within and outside the EU are expected to be liable to import VAT, usually 20 percent, depending on the goods. Currently, VAT on goods acquired from the EU is paid and reclaimed on a business's VAT return but import VAT has to be paid to HM Revenue & Customs (“HMRC”) at the time of entry and then recovered on the next VAT return. It can only be deferred if the business has a deferment account which requires a bank guarantee to be set up in advance, but using a deferment account might save time and money.
Along with import VAT, businesses will potentially have to pay customs duties as well, which may make predicting the increase in costs in different industry sectors more challenging. Some businesses may have to wait until there is more information about trade agreements before final duty rates are known. However, they can get advice now about whether a duty relief scheme might mean they pay less or no tax or duty on imports. Inward Processing Relief, for example, can give relief from customs duty and import VAT on goods that are imported into the U.K. for processing and then exported back out of the U.K. “Processing” can include repackaging or sorting goods as well as manufacturing.
There are also potential benefits from having Authorized Economic Operator (“AEO”) status. This is an internationally recognized hallmark of quality which, according to HMRC, indicates that “your role in the international supply chain is secure, and that your customs controls and procedures are efficient and compliant.” The application process takes around six months, but AEO status does bring both financial and supply chain benefits to your business, including reductions in the level of financial guarantees required for deferment accounts; faster application processes for customs reliefs and simplifications; and fast tracking of consignments through customs borders.
Beyond changes to supply chain, tax and customs declarations, it's important to remember that changes post Brexit could create business opportunities to explore and sell into previously untapped markets, which may become more accessible as a result of leaving the EU.
Businesses need to think through a long list of factors before the U.K. leaves the customs union; they are advised to use the transitional period to consider how they will be affected and try to ensure their business is Brexit-ready. There is no “one size fits all”, approach but early preparation will mean the difference between a business stuck in queues and desperately playing catch up, and one which is ready and raring to go when the transitional period ends.
Sue Rathmell is VAT Director at MHA MacIntyre Hudson, U.K.The author may be contacted at: firstname.lastname@example.org
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