The Practical Impact of Brexit on your Business
The UK’s new Trade & Cooperation Agreement with the EU came into effect on 1st January 2021. Whilst Brexit is still making the news, the UK media have focused largely on the political issues. The border across the Irish Sea, the impact of Brexit on the Scottish Independence debate, fishing rights, Covid vaccination policy. There has been very little focus on the practical effects of the new deal on UK businesses that wish to continue to trade with the EU. With a few months experience of our new trading conditions what are some of the common issues that UK businesses are having to deal with?
The Impact on Trade in Goods
The new UK-EU free trade agreement (FTA) is wholly concerned with trade in goods. It was initially heralded as a triumph, enabling UK firms to continue to trade tariff-free with the EU. After reading the small-print in the agreement, however, it quickly became apparent that this simply wasn’t true.
As with every EU FTA, trade is tariff-free only if the goods concerned pass a Rules of Origin test. This basically means that the goods should have been mainly produced within the country in question and is designed to prevent third countries from benefitting from the tariff-free arrangement.
Many companies had assumed that by having a subsidiary company within the EU, they would be able to avoid tariffs on goods imported from the UK. Whilst a subsidiary in the EU would enable you to recover the import VAT, tariffs are a completely separate matter. If the goods being exported from the UK are mainly produced outside the UK, tariffs now have to be applied regardless of whether you have an EU subsidiary.
The story that has made the news in this regard was when Marks & Spencer fell foul of the new regulations. They imported Percy Pig sweets from the EU into the UK. According to the new Rules of Origin, having been wholly produced in Germany, they were able to do this tariff-free. When M&S then attempted to ship the sweets out to their operations in the Republic of Ireland, because there had been no ‘value-added’ whilst within the UK and M&S were essentially exporting the sweets straight back into the EU, they were forced to pay a tariff under the new rules.
Some UK firms have been facing a double-whammy of tariffs. If, for example, a firm imports goods to the UK from the Far East, those goods most likely already have tariffs applied to them. If the goods are subsequently shipped out again to the EU without substantial processing, they will bear further tariffs under the UK-EU FTA.
This issue is requiring firms to radically alter their supply chain. In the above example, a solution would be to ship directly from the Far East into the EU, avoiding the UK completely, to avoid the double-hit of tariffs.
The Rules of Origin are complex and vary for every product. The required percentage of UK manufacturing varies substantially by product. An exporter is required to look up the specific tariff code within the FTA and check the specific rules applying to that product. It is very important to do this accurately and for it to be documented correctly. This has created a significant increase in the administrative burden on UK businesses exporting to the EU.
Another big issue arising from the UK’s departure from the EU is import VAT. UK businesses continue to be able to zero-rate sales of goods to EU businesses. EU member states, however, will treat goods entering the EU from the UK in the same way as goods entering from other non-EU countries. This means import VAT as well as tariffs are due when the goods arrive in the EU. In the matter of import VAT, it is important to establish the importer of record (i.e. is the entity or individual responsible for all entry documents required by Customs and for the product classification and payment of duties, as well as any other import obligations). It is the importer of record who is required to settle the VAT and can also recover it.
There are some more changes in 2021 that businesses should be aware of. From 1st July 2021, changes to the VAT rules applied to B2C sales in the EU will see import VAT replaced with an obligation to account for local sales tax. Another change involves low value goods consignments. Until 1st July 2021, goods with a customs value of less than €22 are exempt VAT but this exemption ceases from that date. There is a potential minefield of new rules that businesses must keep abreast of.
The new administrative burden on businesses importing goods into the EU from the UK has meant some have decided it is not worth the additional administrative burden and are sourcing their supplies from an alternative supplier within the EU. The long term impact on UK exports is expected to be significant. The UK Office for Budget Responsibility projects the reduction in trade long term to be in the region of 15%.
The Impact on People
If you have EU citizens working within your organisation, you should be alerting them to the fact that by 30th June 2021 they are required to have either settled or pre-settled status in order to work in the UK.
If an employee doesn’t have EU settled status on 1st July, what should an employer do? Employers have an obligation to ensure that they are employing people who have the right to work in the UK and are permitted to make checks of their employees. They should not, however, be seen to be singling out people for checking. To avoid a discrimination claim, the employer should be seen to be checking everyone.
Now that remote working has become commonplace, what if a UK employee decides to relocate to within the EU and work, for example, from their second home in Italy. Is this an issue for your business? In fact it can be quite burdensome for an employer and probably involves seeking complicated tax advice. Tax will almost certainly be due within the jurisdiction that your remote-working employee is living. Who has the obligation to collect that tax is important to establish. Is it the employer’s obligation to set up a payroll scheme or can the employee be left to file their own tax return locally? Is there now a liability for the business for social taxes in the other territory? The answer to these questions will depend on the specific circumstances of the case and will require input from a specialist in tax law. Bear in mind that most EU countries have social taxes significantly higher than the UK’s rate of Employers National Insurance so you might be facing a significant cost increase as a result of remote-working.
Another question to be faced: has a permanent establishment for the business been created in the other territory as a result of remote working? If a taxable presence has been created, does your business now need to register with the local tax authorities and file corporate tax returns? Again, bear in mind that the corporate tax rates of most EU countries are higher than the UK rate, again a potential cost increase for your business
The issue of remote working is potentially costly from both an increase in business tax liabilities and the administrative burden the whole situation could bring.
The Impact on Contracts
The impact of the new UK-EU FTA on your sales contracts might be many and varied depending on your specific circumstances but there are some common areas to be considered.
First, the relevant Incoterms should now be checked and ideally incorporated into your business’ trading contracts. Incoterms rules are a standard set of trading terms and conditions designed to assist traders when goods are sold and transported. So by agreeing on an Incoterms rule and incorporating it into the sales contract, the buyer and seller can achieve a precise understanding of what each party is obliged to do, and where responsibility lies in the event of loss, damage or other mishap. Before Brexit these rules were largely irrelevant.
There are several other commercial issues arising from the UK-EU FTA that you should consider when negotiating your sales contracts in our new world.
- Who bears the cost of any new duties?
- Who bears the cost of any transportation delays at ports?
- Who bears the costs of increased transportation, warehousing and administrative costs?
- Intellectual Property (IP) – IP rights were previously protected across the EU and although the intention of the FTA is for that to continue, separate registration of IP within the UK and the EU is now required
- Data Flows – at the time of writing, the position surrounding data flows is still to be agreed although the general feeling is that data flows will be allowed to continue as before due to the common GDPR rules in place in the UK and EU. It is likely, however, that the EU will seek protection from UK divergence from these rules in the future so we should watch out for future changes in this area.
- Which jurisdiction for legal challenges should be stated in the contract? Previously, this wasn’t an issue as UK court decisions would be binding within the EU but this is no longer the case.
If you trade with the EU there are potentially significant impacts on your business caused by the new rules on the movement of goods and people between the UK and EU and the changes to our commercial agreements that these changes necessitate. Every business impacted by Brexit should be considering them carefully to avoid a costly impact to their bottom line. The issues identified above are the most common arising in the first weeks and months of the new UK-EU FTA. There are likely to be more such issues arising as time passes and our experience of the new rules broadens so we should keep listening to each other and learning how to best circumnavigate our new barriers to trade.