Brexit: the story so far

The story so far

In the week when a deal with the EU is widely expected, albeit negotiations are still ongoing and a no deal scenario is still very possible, let’s look at the current position.

The EU referendum took place on Thursday 23 June 2016 and the people of the United Kingdom voted to leave the European Union.  The Brexit transition period ends on the 31 December 2020 and discussions between the UK Government and Brussels are continuing right up to the wire.

Although we don’t know what agreements will be in place with the EU, trade deals have already been announced with other nations such as Japan and Canada; deals which are broadly in line with those already in place with those nations and the EU.  These are generally being seen as “continuity deals” with more advanced deals to follow at a later date.

If the UK does not reach an agreement with the EU on a future trading relationship before 1 January 2021, the default position is that World Trade Organisation (“WTO”) rules will apply on trade between the UK and the EU, and between the UK and other countries with whom a separate deal has not yet been agreed.

We will update you as soon as anything concrete is known in terms of the EU trade deal, but you need to be aware of the areas in which immediate action is needed.   Please contact us if you need any further advice or support.

What do we know is going to change?

Changes to trade

Regardless of whether we reach a trade agreement with the EU, from 1 January 2021 the UK will operate a full external border with the EU, which will entail major changes for imports and exports to and from the trading bloc. From 1 January 2021, declarations will be needed to import or export specific (limited) goods categorised as ‘controlled’.

UK businesses trading with the EU will need to have a UK Economic Operator Registration and Identification number (“EORI”) number in order to continue trading. Customers and suppliers based in the EU will need an EU EORI number to import / export goods to/from the UK.

The impact on movements of goods and supplies of services is summarised below:

Goods – key changes

Goods imported into the UK:

• Goods coming into the UK will become imports. UK import VAT and customs duty will become due when the goods enter free circulation in the UK.
• UK import VAT at 20% will be charged on entry; this is typically recoverable but key paperwork must be in place.
• Customs duty is an absolute cost; it is payable to HMRC and is not recoverable by businesses so this requires consideration from a profit margin and cash flow forecasting perspective.
• Classification of goods will become increasingly important to ensure businesses are paying the correct amount of duty.

Goods exported from the UK:

• Goods exported from the UK will become exports; therefore export declarations will need to be made and evidence of export maintained to avoid assessments to UK VAT.
• Goods sold to non-business EU consumers that are currently sheltered by the EU distance selling rules will require EU VAT registrations in the country where the consumer belongs from 1 January 2021. Late or non-registration may result in penalties and or interest assessed by overseas tax authorities.
• 19 out of the 27 EU Member States require the appointment of fiscal representatives for non-established VAT registered businesses. In other words, if you supply goods to consumers from the UK and have no establishment in the country where the consumer belongs, you must appoint a local fiscal representative to deal with your VAT reporting obligations.  This can be particularly costly.
• Don’t forget intrastat declarations – if you make them now, you will need to continue to make them for certain movements of goods.
• Goods moving between Northern Ireland and mainland Great Britain will be sheltered under a single market but any businesses impacted should register under the Trader Support Scheme (TSS) https://www.gov.uk/guidance/trader-support-service

All companies involved in supply chains will need to consider the EU border requirements and procedures and access to EU or individual Member State’s systems. These must be adhered to prior to the movement of goods.

Services – key changes

• Business to business services will be largely unaffected.
• Business to Consumer services supplied from the UK to the EU currently benefitting from VAT accounting under MOSS will be impacted. EU VAT registration will be required to report and account for VAT on services to EU consumers from 1 January 2021.

A more detailed summary of the VAT implications can be found here from RPG’s Head of Tax, Nick Donohue.

What if there is no deal?

If the UK does not reach an agreement with the EU on a future trading relationship before 1 January 2021, then the default position is that WTO rules will apply on trade between the UK and the EU, and between the UK and other countries (including those countries with which the EU currently has trade deals).

The World Trade Organisation (“WTO”) is the global body governing international trade. Member countries that do not have a free trade agreement with each other trade under “WTO rules”.

The WTO trade agreements are lengthy and complex but a number of simple fundamental principles run throughout all of these documents. These principles are the foundation of the multilateral trading system.

Under WTO rules, each member must grant the same ‘most favoured nation’ (MFN) market access, to all other WTO members i.e. countries cannot normally discriminate between their trading partners. If the UK were to grant another country a special favour (such as a lower customs duty rate for one of their products), it would have to do the same for all other WTO members.

In other words, exports to the EU would become subject to the same customs checks, tariffs and regulatory barriers that the UK and EU currently apply to trade with countries such as the US. The UK’s exports to the EU and other WTO members would also be subject to the importing countries’ most favoured nation tariffs.

Other considerations?

Currency movements

What currency are you being paid or do you buy in? Have you considered the possibility of future currency fluctuations and how these might affect existing and future contracts?  We suggest that you consider your currency risk exposure and we can signpost you to specialist advice on foreign exchange.

Next steps

We will send further updates as soon as the Brexit trade rules are announced.  Until then please make sure that you understand the implications for your business and speak to us if you need any help.  If we don’t have the answer, we will know someone who does!