Brexit was sold to the country as a way of “taking back control”. But now that we are faced with the prospect of no deal, many businesses are fighting to stay in control.
In fact, with a month to go until Brexit day, companies are so in despair over the government’s handling of the negotiations that many are already bracing for a no-deal outcome.
Getting the technical details of international trade right is going to be essential for many companies trying to make the best of the situation. Confidence is low, in part because there are a number of myths circulating, particularly around the barriers to trade that it’s assumed a no-deal Brexit will create.
Some of these myths can fortunately be quickly dispelled.
Following a no-deal Brexit, the movement of goods will cease to be tariff-free. Goods that currently count as intra-EU supplies will overnight become imports and exports each time they cross into the UK or Europe.
Under normal procedures, they will need to be declared and cleared through customs. Import VAT will be chargeable on goods brought in from Europe, as is currently the case for all non-EU imports. Other issues, such as overseas VAT accounting, will also rear their head.
The payment of import VAT and customs duty will create an additional administrative cost for businesses, estimated by the government to be between £25 and £55 per entry. Given the depth of some cross-border supply chains, and the slender profit margins many companies operate with, this additional cost shouldn’t be dismissed lightly.
An awful freight
Fortunately, for businesses with an EU supply chain, the government has already announced some welcome simplifications to try to assist, including postponed import VAT accounting. This means that UK businesses won’t have to pay import VAT when goods arrive at the border, but can self-declare on their VAT return instead, therefore preventing cashflow problems.
For businesses that are used to intra-EU transactions, this will be very similar to the current accounting adjustments that they already make on their VAT returns. Customs duty, on the other hand, will be an outright cost that can’t be recovered.
The government has also said that it will implement simplified import arrangements, which are designed to support businesses that import from the EU and don’t have an import representative, such as a freight agent.
HMRC has said that it will review this transitional arrangement after three to six months, and give businesses a further 12 months’ notice period before reverting to the current traditional procedures.
UK businesses can register to be included in the simplified import procedures by obtaining a Economic Operator Registration and Identification (EORI) number. Firms also need to take steps to secure a bank guarantee to allow customs duty to be deferred.
All businesses trading in the UK must obtain an EORI number if they’re to continue trading with the EU post-Brexit. This is a relatively simple process, and can be done with just one visit to HMRC’s website.
There are also more sophisticated steps that businesses should consider for the medium to long-term trading environment.
One myth doing the rounds is that it’s a requirement to set up a subsidiary company overseas in order to sell goods to EU customers.
However, in reality, the position is much simpler. If a UK business imports goods into mainland Europe post-Brexit, and is the registered “importer of record”, the liability to register and account for VAT can be done as an overseas business, with no need to set up a subsidiary.
Setting up an overseas subsidiary is a major moment for a business on its journey to success and must be carefully considered.
Bear in mind that, as well as VAT and customs duty, there are other complex tax, transfer pricing, and human capital issues associated with having a permanent establishment overseas.
For example, UK transfer pricing rules operate to make sure that taxpayers don’t enjoy a UK tax advantage through under-reporting UK taxable income or over-reporting UK tax-deductible expenses arising from related party transactions.
Post-Brexit, companies that are thinking of migrating all or part of their UK activities to a European jurisdiction may find that they come under increased scrutiny over transfer pricing.
It may well be the right development for your business to have a permanent establishment in the EU in order to focus on your European market, but it’s not necessarily the best or the only option.
Don’t go overboard
Overseas VAT accounting can be daunting. At the moment, we all follow a harmonised EU VAT system, so the concepts are already familiar.
One way of managing different accounting systems post-Brexit is for businesses to set up a separate country code to ringfence their VAT accounting for another country.
There are also customs duty suspension regimes in place, such as Inward Processing relief and Customs Warehousing, which can help a company’s processing and manufacturing goods by preventing a “double duty hit”.
Meanwhile, the Authorised Economic Operator certification regime, which is referred to as the Trusted Trader scheme, may well turn out to be the sweetener that softens that hard border.
For the next few weeks, businesses should take stock of the facts, as well as the government’s own preparations, to calm those panic moments.
Careful preparation and a thorough understanding of the technicalities of international trade will make a major difference to the ability of businesses to cope with the shock of a no-deal Brexit.