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By Ali Qassim
U.K. businesses are waking up to new challenges on cross-border taxes and customs duties in the wake of the British government’s decision not to remain a full member of the European Union’s customs union after Brexit.
Since the Inland Revenue and Her Majesty’s Customs and Excise merged in 2005 as HMRC, “the Revenue to some degree treated Customs as the poor relation”, Andrew Tyrie, who is chairing an ongoing inquiry into the U.K.’s future economic relationship with the EU, suggested at an EU Treasury Committee hearing. “That is going to need to be reversed now, isn’t it?”
With the U.K. potentially leaving the EU as early as April 2019 following last year’s Brexit vote, major sectors with regional supply chains—including motor vehicles and chemicals, with combined exports of more than 30 billion pounds ($36.5 billion) a year—fear the prospect of the U.K. leaving the Customs Union without any transitional arrangements.
Asked how the U.K.’s tax office is trying to allay such concerns, an HMRC spokesman told Bloomberg BNA the government “is committed to securing the most frictionless trading relationship possible with the EU. We do not hold a preconceived position on the form of this arrangement and cannot speculate on the outcome of negotiations.”
So, given the current lack of detail from HMRC, what cross-border issues should businesses be watching out for?
For financial year 2015-16, HMRC collected 32.5 billion pounds ($39.6 billion) in border revenues, of which by far the largest—22.5 billion pounds ($27.4 billion)—came from import value-added tax, the HMRC spokesman said.
The remaining revenue consisted of 7 billion pounds ($8.5 billion) in excise duties, which “is not solely excise duty collected on imported goods” but “also includes any excise duty collected on removals from U.K. excise warehouses via the duty deferment system”, he said.
Around 3 billion pounds ($3.6 billion) came from customs duties, 80 percent of which “are currently returned to the EU,” he said.
Although by far the largest source of border revenue, “import VAT can generally be reclaimed by businesses and so does not form a bottom-line cost or provide HMRC with ‘sticking tax’,” Julie Park, managing director of the VAT Consultancy, told Bloomberg BNA.
Marcus Dolman, co-chairman of the British Exporters Association (BExA), concurred that “if the importer is VAT-registered, they can recover most of the VAT they outlay” and that “VAT is primarily seen as a cashflow burden for most businesses that is eventually passed on to consumers.”
Established in 1940, BExA members include capital goods manufacturers and international traders and their bank, credit insurance and other service providers.
Park, previously an indirect tax director at Deloitte LLP for nearly 16 years, said “the key issue facing businesses in a Brexit cost in relation to this tax is the fact that they will still need to fund the payment of the import VAT until they receive a credit on their VAT return in a later period.” This “can create significant cashflow pressures given the high rate of VAT of 20 percent.”
Dolman also warned that while VAT-registered importers can recover their VAT, “the system is not made easy in some member states and businesses may have to wait six to 12 months to be reimbursed by their Customs authorities.”
In the EU’s other 27 member countries, VAT rates range from 15-28 percent, so “if we take an average of 20 percent, that increases the initial price of U.K. goods going into the EU by 44 billion pounds ($53.6 billion), he said.
“On the reverse and assuming the U.K. keeps VAT for imports at 20 percent, that’s an additional outlay of 58 billion pounds ($70.6 billion) for EU goods coming to the UK,” according to Dolman.
Mike Hawes, chief executive of the Society of Motor Manufacturers and Traders, told Bloomberg BNA the 700 auto firms SSMT represents have “concerns on all costs that affect the competitiveness of its members’ businesses, in particular the risk of tariffs, including VAT on tariffs.”
To mitigate some of this impact, Park said “so far as import VAT is concerned, there is a mechanism used in some countries where the import VAT is paid on the VAT return rather than separately, so that the credit is taken at the same time and there is therefore no cashflow burden. It would be helpful to U.K. importers if this mechanism were introduced.”
The wider recommendation from the auto industry is for the government “to deliver trade that is tariff-free and avoids the non-tariff and regulatory barriers that would jeopardize investment and growth in this sector,” Hawes said.
“With regard to excise, the most immediately obvious changes post-Brexit relate to the mechanism for reporting cross-border movements rather than the amount of tax itself,” Park said.
Dolman concurred. “BExA does not expect excise duty to change too much once we trade with the EU as a third country, as this is already a complex system of national taxes,” he said.
But he stressed that “if the UK is unable to retain the current simplified procedure of shipping excise goods through and around the EU, then this will have significant impact, especially to companies whose manufacturing operation spans the Republic of Ireland and Northern Ireland and those with pan European supply chains.”
Unlike import VAT, Park underscored that customs duty—a tax levied on imports and taxes depending on the goods’ classification and provenance— “does form a bottom line cost for all businesses incurring it.”
“Therefore, this is likely to be the most pressing issue as businesses try to determine the landed cost of the goods—in other words, the cost including the duty amount—they will be importing in the course of doing business, and similarly the landed cost of their exports to customers in EU locations post Brexit,” she said.
Dolman confirmed that customs duty “is a non-recoverable cost and all businesses have to understand this when trading internationally.”
The “worst case” scenario feared by businesses is that at the end of Brexit negotiations, which could begin by late March, the U.K. will be forced to revert to WTO rules without any transitional arrangements.
A spokesman for business lobby group the Confederation of British Industry told Bloomberg BNA this scenario “would open a Pandora’s Box of economic consequences.” For instance, the UK could face tariffs on 90 percent of its EU exports by value and a raft of new regulatory hurdles.
For the Road Haulage Association, which includes many manufacturers, exporters and importers—“the issue for the supply chain in the road sector is the imposition of customs controls,” Duncan Buchanan, the RHA’s deputy policy director for licensing and infrastructure, told Bloomberg BNA.
“If customs clearance for all leaving and entering trucks (and vans) is required from day one of exit, and clearances take place using current systems, then there will be significant delays imposed on supply chains,” he said.
The EU “has one of the lowest average tariffs in the world,” but BExA’s Dolman said the impact “on leaving the EU without access to the single market or customs union will be that our shipments to the EU”—44 percent of UK exports go to EU-27 which equates to 222 billion pounds ($270.5 billion)—“will be subject to EU customs duties.”
The bulk of these EU-bound exports are “in the high tariff areas such as food, agriculture [and] textiles, so if we take a moderate 5 percent average across the board, then that is” 11.1 billion pounds ($13.5 billion) in non-recoverable costs, “or to put it another way, our goods will be 11.1 billion pounds more expensive to our EU customers,” he said.
Similarly, the U.K. imports 53 percent of all goods from other EU member states. At an estimated value of 291 billion pounds ($354.6 billion), “a moderate 5 percent duty would increase our costs by 14.5 billion pounds” ($17.6 billion), according to Dolman.
Additionally, he noted that the U.K. currently exports over 280 billion pounds ($341.2 billion) of goods to countries outside the EU.
“The EU has Free Trade Agreements with a lot of our major customer markets. If the U.K. is excluded from the EU FTAs, then this will mean shipments to other markets such as Switzerland, South Korea, Chile, Mexico, Norway and others will be subject to customs duty on arrival which will make them more expensive.”
As a recommendation for the government, VAT Consultancy’s Park said “the key lies in their ability to fully understand the impact on all types of industry and to negotiate accordingly—to an extent this relies on lobbying by the industries themselves and is also impacted by any overseas lobbying by competitors in other countries keen to seize a competitive advantage as a result in changing tariffs.”
In addition, she pointed out out that “what should also not be overlooked is HMRC resource—it is vitally important that the HMRC import systems and staff are geared up to the changes on Day One to ensure goods are not held up at borders creating supply chain difficulties.”
Buchanan said the RHA, which carries nearly a third of the food consumed in the UK, would welcome “any clear statements from government that indicate to us the required resources,” such as sufficient customs staff, IT and training, “will be made available to make systems work from day one.”
At a Treasury committee hearing, HMRC’s director of customer strategy, Jim Harra, assured a cross-party group of parliamentarians that the tax office was preparing for the WTO scenario.
He also said HMRC is on track to modernize the customs clearance system in accordance with the new Unions Customs Code the EU will implement by 2020.
In addition, Buchanan said that “given the short time period for negotiations, we believe that it would be prudent to seek early agreement for a period of transition for the movement of goods.”
Dolman agreed that “two years is an extremely ambitious time frame in which to reach a conclusive agreement with the EU” and in the meantime, the U.K. “should be aiming to utilize the existing EU Free Trade Agreements” the EU has with third countries “as transitional agreements to allow continued UK trade with those countries.”
The alternative, he warned, “is a cash flow burden on industry, not just on duties but on admin costs and a slowdown on delivery schedules which will impact trade globally, not just direct trade between the UK and EU.”
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