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Customs and VAT after Brexit: What happens for UK businesses?

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Brexit preparedness remains a big concern for the UK’s businesses. Perhaps the two areas that need most attention are customs formalities (importing and exporting goods or services), and intra-community VAT (invoicing businesses in other European Union member states).

Both these areas will probably change once the UK leaves the EU. There may be long-term adaptations for any business that have to be put into place, and short-term mitigations to be made to overcome issues presented by a no-deal Brexit scenario.

Much of what needs to be understood has already been documented by both the government and the EU. We summarise much of this below, but this cannot be a replacement for consulting official sources and seeking professional advice yourself.

Both VAT and customs formalities are complicated landscapes to navigate, with a large quantity of obscure yet vital detail.

Potential Brexit outcomes

From a customs formalities and VAT perspective, the timing of the UK leaving the EU is critical when it comes to Brexit preparations.

There are two potential Brexit outcomes officially under discussion at this time:

  • No-deal Brexit: This is a scenario where the UK leaves the EU with no withdrawal agreement in place. In this case, the UK immediately ceases to be part of the EU VAT and customs union. As a result, the UK will need to be treated as a ‘third country’ for VAT and customs purposes, which will mean different paperwork. The UK will lose access to some EU systems, there will be a potential impact on cash flow for businesses and there are likely to be additional admin requirements.
  • Withdrawal agreement: In this eventuality, the UK leaves the EU but there will be a transition period of a yet-unspecified length during which time any changes (and business impact) will be less. However, some changes may still be necessary during a transition period.

In a no-deal scenario, adaptations must be made literally overnight, while a withdrawal agreement could allow longer, during which businesses can make adaptations (if the earlier rejected withdrawal agreement is any indication).

There may be additional differences with a withdrawal agreement such as some kind of customs agreement between the UK and EU – but that’s pure speculation until a UK/EU announcement is made.

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What are customs formalities?

Customs is one part of HMRC, which is the government department that collects money. When it comes to goods and services imported or exported from the UK, it ensures the correct process has been completed, including any ‘paperwork’ that must be submitted.

It also collects taxes such as customs or excise duty that is due before any goods cross a customs border.

Excise duties are an additional tax that applies to specific types of goods such as tobacco, alcohol and hydrocarbon or biofuel. Excise duty is normally payable by the importer or manufacturer before the goods can be sold to an end consumer or exported.

Some standards certifications are enforced by customs authorities. If tobacco products are imported to the UK without the correct health warnings, for example, they will be seized.

The EU is a single customs union, which means there are no customs borders between the different countries (or member states).

For businesses that solely import or export to businesses within EU countries, customs formalities have been of little concern up until now because, as a member of the EU, the UK is part of the EU customs union.

This means there is typically no customs paperwork to complete or duty payable. It also means goods pass seamlessly through national ports without pause or delays.

However, once the UK leaves the EU, it will leave that customs union and therefore customs may become due. This could be accompanied by additional administrative requirements, both in terms of initial setup and ongoing paperwork.

How will customs change after a no-deal Brexit?

Importing and exporting requirements will change following whichever of the two paths Brexit takes.

There are several adaptations businesses that import and/or export need to make immediately to prepare for a no-deal Brexit. They will almost certainly be required to some capacity following a withdrawal agreement, too.

Those businesses that have previously traded with companies in non-EU countries will have a head start, but the government has introduced significant infrastructure to make it easier for businesses to trade with the EU following Brexit.

Note that our advice below is only about customs and excise. VAT may also be due in imports and exports, as described later in this article.

Additionally, the rules for goods moving on the island or Ireland may be different from what is described below and will be confirmed by the government in due course.

Importing from the EU to the UK after Brexit

Here are some steps you will need to take before importing goods from the EU after a no-deal Brexit.

EORI number

Some businesses have automatically been sent UK EORI numbers, while others should apply for them. But all businesses importing or exporting into the UK will need one.

A UK EORI number can be identified as it will begin with GB. If you import goods into the EU (including goods that you move from the UK to the EU) you will also need an EU-issued EORI number.

If you previously imported goods from other countries and applied for your EORI number from another EU country, you will also need a UK number and may need to apply afresh.

Commodity codes

Customs relies on the system of commodity codes – numbers that in theory can be applied to every kind of good that’s imported or exported.

The UK will use the same system as is currently used in the EU and that is based on the World Customs Organisation’s Harmonised System. For this reason, the commodity code is also sometimes known as the Harmonised Code.

Commodity codes are eight digits long for goods you export and 10 digits long for goods you import. You’ll need to know which code applies to the goods you wish to import, and the government offers a free look-up tool online.

For some goods, you might need to apply for a Binding Tariff Information (BTI) decision, which can take up to two months to complete. Therefore, looking up commodity codes for all goods you may import is one procedure, at least, that you should initiate immediately.

Customs declarations

Your business will need to make customs import declarations for goods that enter the UK from other countries including the EU (unless they’re going into temporary storage). This includes the value and country of origin.

Import declarations can be complicated and require software that can integrate into the government’s Customs Handling of Import and Export Freight (CHIEF) system (although this will soon be replaced with the Customs Declaration Service, or CDS).

Because of the complexity, the government suggests businesses may want to use a customs agent to advise on, and complete import declarations.

Customs payments (tariffs)

In addition to customs declarations, you will need to know the tariffs applicable to the goods, so you can ensure cash flow isn’t impacted, and pay them when due (note that duties could be paid monthly).

In the event of a no-deal Brexit, temporary custom tariffs will apply to EU imports to the UK for up to 12 months. The government has said these will reduce tariffs to zero on 87% of imports into the UK (from both EU and non-EU countries).

However, there may be preferential tariff rates in place if the country has a trade agreement with the UK, or is part of the Generalised Scheme of Preferences. Tariff Quotas might also apply.

The same commodity code look-up tool mentioned earlier will also reveal whether a good imported is covered by these schemes, as well as its duty rate.

Importing by post

Trade goods imported by post from the EU must be declared by the sender using a postal customs declaration (form CN22 or form CN23). If they fail to make a declaration, the goods may be held at the border by customs.

This is as per existing rules detailed in Notice 144 that you may have already used when importing from countries outside the EU.

Importing goods by baggage or by car

Goods brought into the UK via baggage or ‘small motor vehicle’, if intended for commercial sale or for use as spare parts or trade samples, must be declared before they’re moved across the border.

Notably, there are different rules for goods valued at £900 or more, and weighing 1,000kg or more.

Simplified procedures

HMRC offers several simplified procedures to make importing as easy as possible: transitional simplified procedures (TSP), and the customs freight simplified procedures (CFSP). They require registration before use, and the CFSP requires your business to be specifically approved by HMRC.

Although both systems vary in details of how they’re implemented, they have the same goal of simplifying procedures and allowing goods to be released from customs before you submit a full declaration and pay the required customs duty.

They should therefore be considered essential for any business importing goods. Critically, both schemes delay when customs duty must be paid to HMRC but the duty must eventually be paid and this must be planned for when considering profit and cash flow.

Businesses can also use the Common Transit Convention (CTC), which the UK will remain part of following Brexit.

This simplifies the movement of goods travelling through common transit countries such as those in the EU, in that customs duties become due at the final destination and customs declarations are not due at each border crossing. It relies upon the new computerised transit system.

Duty deferment account

If you import regularly then paying duties monthly might make more sense, rather than paying them immediately upon import. A duty deferment account lets you do this, although your bank or an insurance company will have to be willing to act as an approved guarantor on your behalf.

A duty deferment account is a necessity for the TSP and the CFSP, as described above.

Excise duty

Some goods such as alcohol, tobacco products and biofuels are subject to excise duty when they arrive in the UK. These are separate from customs payments, although they utilise the same commodity code system.

You will need to know what excise duties are required, and also about drawbacks and relief systems that are in place that might reduce this amount.

Import licences

You may need to apply for licences to import certain goods into the UK, and some goods might require an inspection fee be paid.

Incoterms

Review the commercial terms of trade (Incoterms) in your contracts relating to importing goods. These will help you to understand who is responsible for customs duties, import VAT, and any additional transportation costs.

Transport logistics

The organisations you use to transport goods across borders, such as sea shipping, couriers or air freight, will need to know many of the details above before shipping commences. You should consult with them immediately to learn what they will require, and when.

There might be additional issues you will need to consider when importing goods, such as using the correct border inspection post and pre-notification of the movement of goods. The government’s general Brexit preparedness tool for business will help you discover this information.

Read more about international trade:


Exporting from the UK to the EU after Brexit

Here are some steps you will need to take before exporting goods to the EU after a no-deal Brexit. Much of the information is similar to the instructions above.

EORI number

You will need a UK EORI number beginning with GB to export goods out of the UK. You will also need to know the EU EORI number for the European business you’re exporting to.

If they haven’t got one, they will need to apply for one in their own country. This will involve contacting all the businesses you export to in the EU to ensure they have an appropriate EORI number ready for Brexit.

If you are moving goods to your own warehouse in the EU, you will need your own EU EORI number.

Commodity codes

The importer in the EU will need to pay tax and duty on what you export to them, therefore it is important to ensure you use the correct commodity codes.

Export declarations

As with importing, the government suggests you hire a customs broker for making customs declarations. If making declarations yourself, you will need to register for and use the National Export System, which will let you make declarations electronically. This requires the use of specialist software.

You’ll also need to register for the New Computerised Transit System (NCTS).

Exporting by post

Goods sent to the EU will now need a customs declaration (CN22 or CN23) when posting. Items that require an export licence should include a commercial invoice, and a C and E83A ‘Exported by post under HMRC Control’ sticky label should be applied in line with VAT Notice 143.

Moving goods by baggage or by car

As with importing, goods carried in baggage during travelling, or by car, from EU countries will now need to be declared in the red channel at ports (or via the red phone if no red channel is present).

You may need to complete a C88/SAD form, and pay customs duties, although the rules are complicated and should be consulted before travel.

Simplified procedures

As with importing, if transit is used then the use of simplified procedures is recommended for cash flow purposes.

Export licences

Some goods require export licences, and there are additional rules specific to alcohol, tobacco and certain oils, and for controlled goods. You will need to ensure you have these in place prior to export.

Incoterms

Businesses should review the commercial terms of trade (Incoterms) in contracts relating to delivery of goods for those you export to. These will help you to understand who is responsible for customs duties, import VAT and any additional transportation costs.

Transporting goods

Businesses can utilise commercial goods transportation services, which is certainly the easiest option, or opt to use their own transport.

In the latter case, operator licences and permits will be required, the driver will need to be eligible to drive abroad (and will need to ensure they carry the correct documents), and there might be rules for certain goods that need to be transported.

Businesses that export a lot of goods might want to apply for authorised consignoree and/or consignor status, to avoid the need to use customs offices to start and end transit of goods.

Getting help with importing from/exporting to the EU after Brexit

The government has published help for businesses who have to import from/or export to the EU following Brexit.

Additionally, consider the grants available for training and IT improvements to help businesses that complete customs declarations. In order to apply, businesses must be UK established and meet their tax obligations.

Training grants are available for businesses that will need to submit customs declarations for themselves or for another business, and IT improvement grants to businesses of a certain size.

What is VAT?

Value Added Tax (VAT) is an indirect tax applied to all sales, including both business-to-business (B2B) and business-to-consumer (B2C) sales.

The amount of VAT charged will vary depending on they type of business receiving the goods or service, the origin and destination countries of the goods or service and what type of goods and services are being sold.

A UK business must register for VAT should their VATable turnover rise above the VAT threshold (currently £85,000), after which they then start both charging and accounting for VAT.

VAT is charged by businesses on behalf of the government and is periodically declared and paid to HMRC, typically via quarterly VAT returns.

VAT-registered businesses can offset the VAT on the goods or services they sell (known as their output VAT) against the VAT they pay when they acquire goods or services from other businesses (known as their input VAT). The difference is what they then owe to HMRC.

How will VAT change after Brexit?

Domestic VAT rules remain the same following Brexit. However, how VAT is charged when importing and exporting to the EU will change, although the government says VAT procedures will be “as close as possible to what they are now”.

The UK is currently part of the EU VAT area. The rules mean a UK business doesn’t have to register for VAT in each EU country. After Brexit, or the end of a withdrawal period following Brexit, the UK will probably leave the EU VAT area.

As with customs arrangements, VAT on trade between Northern Ireland and Ireland are likely to be different from what’s described below.

Here’s six points on how VAT will operate for importing from/exporting to the EU following Brexit:

1. Selling goods to businesses outside the UK

At the moment, if a VAT-registered organisation in the UK sells VAT-eligible goods to a VAT-registered business in another country, they zero-rate the sale. In VAT terminology, the sale is known as making a dispatch if it’s to an EU country or an export if it’s to a non-EU country.

This zero-rating requirement is true for both EU and non-EU countries.

However, for a B2B sale to a VAT registered business in another EU country, the seller must notify the customer that they are responsible for accounting for and paying the VAT using the ‘reverse charge’ rules.

Following a no-deal Brexit, exports will probably continue to be zero-rated, although the VAT terminology will change and they become exports. UK businesses will also benefit by no longer needing to complete intra-community reporting including the EC Sales list and Instrastat report.

The EU business you’re supplying will probably need to account for VAT and also customs on the goods, so you should open a dialogue with them immediately so they can be prepared.

Note that among the requirements for the customs Common Transit Convention, discussed earlier, is to ensure a guarantee is in place for covering customs or import in the destination country.

2. Selling goods to consumers or non-VAT-registered businesses

At present, selling goods to non-VAT-registered businesses or individuals across EU borders is known as distance selling.

In this case, a UK business applies the UK VAT rate to sales (which is to say, it’s paid by the consumer), although each EU country has a threshold for individual and combined sales that, once passed, means the UK business must register for VAT in that country.

Following no-deal Brexit, distance selling no longer applies and UK businesses will probably need to zero-rate these sales. The purchaser in the EU country will have to pay local VAT and also customs to their own government – this should be communicated within your sales and marketing materials.

3. Bringing goods into the UK

At the moment, when a UK VAT-registered business is sold VAT-eligible goods by a VAT-registered business in an EU country, the UK business accounts for the VAT using the UK’s rate under the ‘reverse charge’ rules.

They do this by charging it to themselves as part of their VAT accounting.

Following a no-deal Brexit, UK VAT will be due on goods at the same time that customs duty is due, which is normally when they enter the UK from the EU (or indeed anywhere else).

But the government has said businesses will be able to use postponed accounting to account for import VAT in their VAT return, rather than paying it immediately. This will avoid any impact on cash flow but will require some changes to your VAT accounting procedures.

4. Supplying services

At present, the place of supply rules for supplying most kinds of services mean UK businesses charge and account for the rate of VAT of the EU country where the business resides.

This will not change after a no-deal Brexit, with the exception of financial and insurance services, and Mini One Stop Shop (MOSS) business.

Notably, supplying services may require VAT registration within each country in which they are supplied, and this work should commence immediately within your business.

5. Mini One Stop Shop (MOSS)

Currently, this scheme applies to businesses that supply digital services, and has two components: Union MOSS, which applies to businesses in the EU, and non-Union MOSS, which generally speaking applies to countries outside the EU.

Following a no-deal Brexit, MOSS businesses will need to register for the non-union MOSS.

6. Non-Union VAT Refund scheme

If your business habitually trades goods within EU countries, it may be worth registering for VAT in those countries.

But if this kind of trade is less common, you may wish to simply apply for refunds on any VAT you pay. This is done via the EU’s Non-Union VAT Refund scheme, with applications made within each country.

You will need to use the Thirteenth Directive (non-Union) scheme rather than the Eight Directive Scheme.

Getting help with VAT after Brexit

The government has published guidance on VAT following no-deal Brexit. The EU has also published some guidance for European businesses that you might direct your customers towards.

Conclusion on VAT and customs after Brexit

The UK government has tried to keep changes to a minimum following Brexit but the simple fact is that the new customs and VAT requirements represent a significant upheaval for all businesses. Work needs to start immediately, if it hasn’t already, on making preparations.

While you may need to make adjustments for a no-deal Brexit that might not happen, the truth is that many of these adaptations will be required anyway in the event of a withdrawal agreement.

For example, you should immediately review supply chains and assess the potential implications, such as EU VAT registration and reporting obligations.

You should ensure you meet the evidence requirements for zero-rating exports. Systems changes may be required, so speak to your IT/software services provider.

You might want to register for simplified customs systems, such as the TSP, and this will take time both from an administrative point of view, and also time to complete on behalf of HMRC.

You should talk to the suppliers of any invoicing or accounting software you use and understand if you need to make any changes or upgrades to ensure that Brexit-related changes will correctly be applied.

You should budget for this time in your preparatory work. If you require a customs broker then you should recruit one immediately, and remember that businesses offering such services are likely to be severely constrained in the event of a sudden no-deal Brexit.

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