A Brexit Update
Implications for Irish businesses on the re-introduction of borders
The clock is ticking on the UK leaving the EU. From a VAT perspective, while it is expected that the VAT system as it currently sits may remain largely unchanged at least for the time being, what the UK will have available to them is a freedom to make changes to its VAT laws and systems going forward as it will no longer be bound by EU legislation and case law.
Once Brexit occurs, the UK will become a ‘third country’ for VAT purposes and where once there were intra-Community supplies and purchases between Ireland and the UK, there will be exports and imports bringing with it likely cash flow implications of VAT arising on point of entry, customs duties and additional documentation requirements. A number of the simplification measures available for use by EU Member States will be impacted, for example triangulation relief will no longer apply where a UK entity is a party to a supply chain previously availing of this relief. This gives rise to the possibility of a VAT registration requirement for businesses in the country of destination of the goods, which previously may not have existed, or lead to a requirement to change contractual terms to avoid this requirement. Also to be considered are the loss of the distance sales thresholds for B2C supplies of goods to the UK.
A little good news is offered up in that Intrastat and VIES reporting will no longer need to include UK transactions – every cloud as they say!
Scenario planning, which would involve a multidisciplinary group from the Deloitte Brexit Response Team, should be undertaken to assess supply chain implications, the potential impact from a commercial, legal, logistical and pricing perspective, documentation requirements, IT system changes and the increased administration and compliance costs for Irish companies trading with the UK. It is worth exploring the import VAT reliefs available such as the deferment account facility with a view to potentially mitigating cash flow impact on entry. However, businesses currently importing goods from the UK should not underestimate the impact that paying VAT on imports of goods from the UK will have on the cash flow of their business after Brexit. At present this import VAT is dealt with by an accounting entry on the VAT return with no cash funding cost for a business whatsoever. Following Brexit the business will have to pay VAT possibly at 23 percent to the Revenue Commissioners on every import and claim a deduction or refund in the VAT in their VAT return. For businesses importing goods from the UK on an ongoing basis this will permanently tie up approximately three months VAT, possibly at 23 percent, on the value of goods coming from the UK with the Revenue Commissioners.
It is likely that an even bigger impact for businesses trading with the UK will arise on the customs side. Customs requirements will seem particularly onerous for those businesses who, at present, are operating only within EU Member States and so have not previously had to navigate the world of imports/exports and customs formalities.
From a customs perspective, Brexit will mean that the UK would no longer be part of the EU Customs Union or single market and, as with VAT, would revert to a third country status. In the absence of a trade agreement, all goods which pass through the UK border could be subject to Customs duty and formalities.
Many Irish businesses rely on the UK for supply of raw materials and supply chains are complex and interlinked. A production process could require several UK border crossings at different stages of production.
Goods which are destined for EU markets using the land bridge through the UK would also be subject to Customs procedures. A transit document (Proof of Union Status) will be required and a guarantee must be provided securing the potential customs debt which is equal to the value of duties and other charges. Documents confirming the EU status of the goods would have to be retained by the driver during the movement and presented to the authorities if requested.
It is expected that whilst there will have to be some form of border control that both the EU and UK will work together to minimise the impact by using electronic data exchange of customs information where possible. The EU are currently in the process of implementing a Multi Annual Strategic Plan (MASP) to improve communication between customs offices throughout the Union. It is hoped that by streamlining customs processes and converging IT systems that traders will save money and time and that safety and security would be improved. However as the UK will not be part of this system into the future it may not have comparable systems in place after it leaves the union and there may be practical difficulties arising from the use of EU and UK systems. This may delay transit and entry traffic to and from the UK.
Looking at the US / Canada border, a best practice model, there are many simplifications which could be imitated such as the Driver Registration Program and Free and Secure Trade (FAST) program whereby every link in the supply chain from manufacturer to haulier to importer must be an authorised operator. Benefits of the FAST program include dedicated lanes at border crossing points and faster customs and immigration processing. Customs import and export information and commercial documents are transmitted electronically in advance and risk assessment is completed pre-arrival.
In the meantime, traders should be considering customs simplifications and authorisations to reduce the impact of a hard border. The Authorised Economic Operator (AEO) authorisation could prove useful to businesses by reducing delays to goods as a ‘trusted trader’ and benefiting from mutual recognition with other countries such as the US and Japan. It also provides potential reductions in guarantees required to operate Customs special procedures such as warehousing and inward/outward processing regimes.
We would advise that the process of scenario planning gets underway to assess the potential impact for your business of both VAT and Customs, and that steps are put in place to ensure the change readiness of your business as we move towards the Brexit deadline. Our advice is to plan for a scenario of maximum change and to act now.
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