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Entering The Third Phase Of Brexit- VAT And Customs Duty Considerations

For many organizations trading in goods, the end of this month could mark the end of the second phase of Brexit and the start of a next. In this third phase, organizations are likely to want to take the time to review how effective their import and export movements have been so far and to review whether any unexpected liabilities may be building up, which could require remedial action.  

Current Position

For many, the run-up to the end of the Brexit transitional period on 31 December 2020 involved hasty preparations to start the UK’s new international trading relationships. From a VAT and Customs Duty perspective, businesses trading in goods faced the greatest changes. These changes were significant and created “business-critical” risks for organizations to deal with, both in terms of minimizing the impact on their margins and ensuring the ability to continue to trade with their customers and suppliers.  

For the first few months of 2021, those organizations have primarily been reacting to the new Brexit rules, both from a technical perspective and a practical one. There were several “myths” about the UK/EU trade deal which resulted in considerable friction. 

  • One example is the necessity for businesses to submit import and export declarations when goods cross the UK/EU border. This is a new procedure for many. 
  • Another example is the Northern Ireland Protocol, which is still bedding down and has added additional complexity for those trading with customers in Northern Ireland. 
  • A further issue is that the UK/EU trade deal was not completely tariff-free. Zero tariffs only apply to goods that originate in the UK or EU. Goods that originate from another country may not fall within the UK/EU trade deal parameters, meaning they are potentially subject to positive rate duty when imported. 
  • A significant change for UK businesses selling goods to customers in the EU and vice versa is the potential to maintain overseas VAT registrations in the destination country or countries. This is likely to be required where the supplier acts as “importer of record” into the destination country as the VAT rules treat the supplier as importing the goods and subsequently making a sale of the country’s goods. Maintaining overseas VAT registrations is not always straightforward, even when the preparation of VAT returns is outsourced. 

The third phase

The amount of change arising from the UK’s exit from the EU differs from business to business. However, generally, organizations believed that they would do no more than ensure that they had taken the minimum necessary steps to ensure their products could reach their customers after 1 January 2021. Now that organizations have had several months to adjust to the new Brexit rules, they may want to use the coming months to review whether their revised arrangements are working effectively and consider whether a more strategic approach can be taken.  

This could include:

  • The use of customs duty reliefs such as Inward Processing, Returned Goods Relief, or Customs Warehousing to mitigate the cost of import tariffs. These are specific reliefs that can help alleviate the payment of import taxes when the goods do not remain in the country. The reliefs take time to put in place, so for many, there was insufficient time to do so before the end of 2020. The reliefs will be of particular interest to those organizations that temporarily move goods into a country for manufacturing/ processing before then moving on to another location; the crossing of a Customs border generally results in the payment of irrecoverable import taxes, so multiple movements and payments can have a damaging impact on margins.   
  • Completing their own customs declarations. Many organizations, particularly those who are not experienced with filing their own customs declarations, propose using a 3rd party customs agent to do so. At an average cost of around £30-£50 per declaration, these fees can mount up for organizations making a high volume of imports/ exports. With appropriate time to train and set up the relevant IT systems, this function could be brought in-house to reduce costs. 
  • Changes to supply chains. Many organizations mapped their existing supply chains and then identified the immediate tax changes arising. It may be that there are more tax-efficient ways of carrying out these sales, and organizations now have more time to plan such changes. For example, could secondary warehouse locations be used to reduce delivery times or reduce the number of EU VAT registrations that are in place to reduce tax compliance costs? 
  • Organizations should review whether they have duty deferment accounts in place as they can bring cash flow savings. However, there can be a need for a bank guarantee that brings costs, so organizations should check whether the guarantee levels remain appropriate and/or if a duty deferment account is needed at all. 
  • Consider whether obtaining Authorised Economic Operator status could be beneficial. AEO status is an internationally recognized quality mark that shows the business’s role in the international supply chain is secure and has adequate customs controls in place. As well as reputational advantages, having AEO status can bring administrative and financial savings. For example, in the UK, and AEO certified business does not need to provide a bank guarantee to operate a duty deferment account. Separate UK and EU AEO authorizations would be required. 

From 1 January 2021, the UK has a new international trading relationship. For many organizations, the lack of certainty caused by the UK/EU trade negotiations only concluding in late December 2020 meant that the first few months of 2021 had been spent in a largely reactive way, whereby organizations ensured that their products could move to customers. Now that the immediate hurdle has been overcome, organizations are encouraged to review whether their arrangements have any hidden costs that can be removed in full or made more efficient from a VAT or Customs Duty position. 

Something which may be of interest to UK-based small and medium-sized enterprises (SMEs) that have not previously been involved with import or export transactions is the government’s Brexit support fund which is now open for applications. SMEs can apply for a grant of up to £2,000 to support them while adapting to new rules on trading with the EU. Applications must be submitted by 30 June 2021.

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