Issues arising from the UK-EU Trade agreement
When the UK government announced that it had agreed a Free Trade Agreement (“FTA”) on 24 December 2020, there was a collective sigh of relief from businesses in both the UK and the EU which, until that point, had been bracing themselves for a no-deal Brexit. However, the FTA agreement has proven to be more complex than initial reports had us believe. As details of the agreement emerge it is apparent that the FTA agreement has led to significant complexities and unforeseen costs for businesses.
Dated: 19 February 2021 Author: Terri Bruce, Director of VAT & Customs
We have set out below a number of the unexpected consequences and some of the common issues encountered by businesses. This covers both VAT and Customs issues as both are usually inextricably intertwined with each other.
The free trade agreement specifically allows for duty free access to the UK for EU origin products and duty-free access to the EU for UK origin products. However, if items are imported into the UK and then re-exported to the EU, duty will be due in the Member State of importation as the preferential status does not apply to EU origin products exported from the UK unless the goods have undergone a process in the UK and have been substantially transformed.
This appears to have been a specific issue when goods have been sent from the UK to the ROI as the Irish Tax Authorities have prevented goods from entering the ROI until duty has been paid. This has led to unexpected delays and increased costs.
The issue of origin has become central to a lot of issues arising from the FTA as the rules governing origin were changed overnight and have become incredibly complicated. The detailed rules governing origin are set out in the Trade and Co-operation Agreement (“TCA”) and extend to in excess of 70 pages. There are specific rules for individual commodity codes and so it is not sufficient to assume that applying a process will be sufficient to change the origin of a product.
One concession obtained by the UK Government is that UK businesses will not be required to submit formal certificates of origin until January 2022. However, as origin governs the rate of duty payable, importers are demanding information from suppliers which does not fall much short of an official certificate. There is also concern that the information supporting origin can highlight margins and make supply chains more transparent; thus, creating the risk of the customer by-passing the intermediate supplier and going straight to the source.
Where goods are imported into the UK in order to be re-exported into the EU, double taxation may arise as duty may be payable in the UK and also in the EU if the origin of the product remains unchanged. This also applies to EU origin products imported into the UK for re-export. One way of avoiding double taxation is to import goods into a Customs warehouse as this suspends the imposition of duty. A warehouse does not have to be a physical building; it can simply be a virtual stock control system. Some businesses have avoided using a warehouse because they are concerned about an increase in the level of paperwork but warehousing can actually make the process of importing and exporting easier as a full import declaration does not have to be made at the time the goods enter the warehouse and it is possible to consolidate paperwork for goods leaving the warehouse so this can often provide a beneficial solution.
Import and Export Declarations
The FTA has not resulted in friction-free trade as paperwork is required to import and export goods. Businesses which have been authorised to use simplified procedures are not required to submit import documentation until 1 July 2021. However, the level of paperwork required by businesses has increased dramatically. In addition to import and export declarations, businesses may also be required to submit health certificates, origin certificates and other documentation. There is a shortage of customs agents available and the costs are high. Therefore, many businesses are seeking to do the paperwork themselves.
NI has a hybrid status; it remains part of the UK for VAT purposes but part of the EU for customs purposes. Whilst there is no hard border between ROI and NI, the protocol has created a requirement for GB businesses to declare sales to customers in NI using the newly created Trader Support Service (“TSS”). GB businesses trading with NI are required to register with the TSS and then obtain an XI EORI number specifically for sales to NI. The intention is to ensure that goods originating from GB do not enter the ROI without duty being accounted for. This process has led to confusion as businesses and freight forwarders struggle to understand the requirements and this has led to delays.
Inco terms are of paramount importance as they determine who is responsible for the import or export declaration and can also result in VAT registrations being required. Common issues include business supplying on an ex works basis being asked to pay guarantees to shippers even though the customer is responsible for the goods when they collect them and is required to make the export declarations.
Some UK businesses have agreed to supply on a DDP (delivered duty paid) basis in order to facilitate trade with their customers however, this means that the supplier has a liability to register for VAT in the member State of importation and declare the import and the onward supplies on their VAT returns. This can result in delays at ports and airports but can also result in breaches of regulations and penalties for non-compliance.
HMRC has introduced postponed import VAT accounting for all imports into the UK. This means that instead of the importer paying VAT on importation and then recovering it on their VAT return, the import is simply included on the VAT return in boxes 1, 4 and 7. This alleviates any cash flow issues arising. We note that some freight forwarders are still charging VAT on importation. Businesses should advise them that Postponed import VAT accounting should apply.
Businesses which import goods for processing on behalf of overseas businesses should apply to use inward processing relief. This allows goods to be imported VAT and duty free. When goods are returned to the owner, duty is only payable on the added value element. Failure to use IPR could result in irrecoverable import VAT for the processing company.
Conversely, if UK businesses are sending goods to Europe for processing, Outward Processing relief should be used. Otherwise, if goods are exported and the process does not change the origin of the product, then duty could be due on the re-importation.
Another area causing significant issues for UK businesses is e-commerce. When the UK left the EU, it lost access to the distance selling simplification which allowed UK businesses to apply UK VAT to retail sales to consumers in other EU Member States until the distance selling threshold was breached at which point the UK company had to register for VAT in that member State and charge local VAT on supplies. Now there is no distance selling threshold and VAT (and duty if applicable) is due in the member State where the customer belongs.
Some retailers are managing this by authorizing the courier to collect the VAT and duty from the customer on delivery, but this has commercial ramifications for client satisfaction. Others are choosing to register for VAT wherever they make sales. Others have stopped selling to EU customers or are considering wholesale options.
From 1 July 2021, the EU is introducing a one stop shop which will resolve this issue as suppliers will be able to account for all European retail sales through a single portal. Until then, there are a number of strategies for dealing with the VAT problem and retailers need to be aware of the issues and the consequences of getting it wrong.
Whilst all of the above are technical VAT and Customs issues, they all have commercial implications which can have a significant impact on your clients’ businesses.
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