As Parliament debates the Brexit Withdrawal Agreement and the Political Declaration for the Future Framework, we have set out below some of the key issues businesses need to consider in each of the three likely outcomes.
During a transitional period, and potentially also during the period of the application of the so-called “backstop”, EU law will continue to be applicable in the UK.
The UK will continue to be a member of the single market and the customs union, meaning there will continue to be no borders for the movement of goods. The VAT reporting for movements of goods between the UK and the EU will continue to be done after the event on VAT returns, EC Sales lists and Intrastat returns where required.
For online sales by UK suppliers, the seller will continue to be responsible for accounting for either UK or local VAT depending on sales values, and goods can still be delivered by post directly to a private customer in another EU member state.
For more complex supply chains, triangulation will still apply to prevent a UK business buying goods in one member state for delivery to a customer in a third member state from needing a VAT registration in the member state of either the supplier or the customer. Other simplifications relating to supply and install contracts and call-off stock will also continue to apply.
However, the transitional period is not intended to be the end state for trade between the UK and the EU, so during this period it will be essential for businesses to keep UK/EU negotiations under review and to develop new plans as appropriate.
The political declaration envisages that a free trade agreement will eventually be reached between the UK and the EU. Once this is put into place, and provided that it deals satisfactorily with the Irish border, then the UK will become a third country and there will be a border for goods movements between the UK and the EU.
In order to have solved the Irish border issue, it is likely that any borders will be technologically enabled to make them as frictionless as possible, and trusted traders (e.g. those with authorised economic operator status) will gain the most benefit from these changes.
A free trade agreement means that there will be no customs duty on goods from the UK moving to the EU or vice versa, provided that the goods concerned meet the origin requirements set out in the Free Trade Agreement.
To qualify for importation without customs duty under the FTA, goods will need to contain a stated proportion of components manufactured in the FTA partner to prevent the FTA being used for goods from third countries with less favourable trading terms. Establishing and documenting the origin of goods being sold to EU customers under the FTA will therefore become very important.
In a free trade agreement, the UK will no longer be a member of the EU VAT area and the simplifications available to members can no longer be used by UK based businesses.
For example, in a triangular transaction involving goods purchased by a UK business from a supplier in one member state for delivery to a customer in another member state, the UK business will need a VAT registration in the member state of the supplier or the customer in order for the transaction to take place without a VAT cost arising.
In a Free Trade Agreement there will an issue for UK retailers selling to EU private consumers, where the consumer will become liable for import VAT which may be payable before the goods can be delivered. However, it is likely that within the next few years both the EU and the UK will develop technological solutions which will allow the seller of internet goods to account for VAT in advance of the dispatch of the goods to the customer.
The VAT treatment of goods purchased from the EU will also change and it is possible that VAT will become payable on goods when they arrive in the UK from the EU or shortly thereafter, as is currently the case with imports from outside the EU.
HMRC has announced that, in a no deal situation, there would be a change in this treatment to “postponed accounting”, where import VAT is accounted for on VAT returns rather than paid in cash and it is possible that this will also be the case once the FTA is finalised.
In the absence of an agreement with the EU which has been endorsed by a meaningful vote in the House of Commons, the default position is that the UK will leave the EU on 29 March 2019 without a transitional period or any agreement on trading terms.
If this is the case there would be a number of implications, including customs duty at third country rates on sales into the EU from the UK, and potential customs duty on goods coming into the UK from the EU.
HMRC has announced that in this situation it would introduce postponed VAT accounting to avoid the need for businesses importing goods from the EU to pay VAT in advance of it being reclaimed on VAT returns. This would extend to imports from non-EU countries, giving a significant cashflow benefit to large importers.
However, significant delays are likely at ports, particularly Dover/Calais, as a result of document checks which are likely to be required, and these delays could impact businesses operating just-in-time manufacturing supply chains or moving perishable goods.
In a no-deal situation there will an issue for UK retailers selling to EU private consumers, where the consumer will become liable for import VAT which may be payable before the goods can be delivered.
HMRC has announced that it will introduce a scheme to allow EU-based internet retailers to pay UK VAT on goods for UK consumers using a new technology solution. However, it is unlikely that either the EU or the UK will have developed technological solutions to allow the seller of internet goods to account for VAT in advance of the dispatch of the goods to the customer in time for use in early 2019.
Until it is clear that the possibility of a no-deal Brexit has been ruled out, it is important for all affected businesses to be planning for it by reviewing their supply chains to identify the potential problem areas, making sure they are ready to prepare the customs documentation that will be required, and to consider whether other ports or air freight could be used to reduce the impact of delays at the Channel ports.
If you would like to discuss with us how Brexit will affect your business, please contact a member of our Brexit team.