What are the implications of a 'Hard Brexit' on UK importers and exporters?
On the 17th of January, Theresa May stated "the UK cannot possibly remain within the European single market" giving the strongest indication yet that that the UK is heading toward what has been termed in the media as a 'hard Brexit'.
As a member of the EU single market we are part of the EU customs union, meaning that UK and UK-based firms can sell their goods to EU customers without having to declare these to HMRC and pay additional taxes. Likewise, British firms and consumers can import from the EU tariff-free. While the EU has a form of customs union with three countries outside of the EU; Turkey, Andorra & San Marino. David Davis (Secretary of State for leaving the EU) stated during the reading of the Government's Brexit White Paper that the UK is 'definitely leaving' the customs union.
What does leaving the single market and the customs union mean for us?
Essentially there are two options:
1) A newly negotiated trade deal like the EU has with Canada or South Korea, which eliminate most tariffs and many other trade barriers. But the EU's record is one of slow progress in similar talks, and political tensions from the Brexit process could also be an obstacle
2) An arrangement sometimes called World Trade Organization (WTO) terms
One of the most important principles of the WTO is that you should not discriminate between other WTO members. The UK and the EU would both have to impose on one another's exports the same barriers they apply to goods from the other WTO member countries. In fact, in the absence of a free trade agreement they would be obliged under WTO rules to do that.
In practice, this should prevent the EU introducing tariffs on the UK which would discriminate or punish, or the UK introducing similar tariffs on the EU. The maximum tariff that can be applied will be the same as the tariff applied to the MFN
(most favoured nation).
In 2013, the EU’s trade weighted average MFN tariff was 2.3% for non-agricultural products. This is an average figure and tariffs on some individual products are much higher, especially on agricultural goods. The EU tariff on cars, for example, is 10%.
Most commentators agree that a newly negotiated deal cannot be achieved in the two year timeframe set out in article 50 and therefore unless an extension is given, which seems unlikely (past precedent for other deals suggests negotiations might take anywhere from 4 to 10 years), a fallback to WTO MNF tariffs is the most probable outcome.
Under this scenario what are the practical considerations for UK businesses?
Exporting goods to EU countries:
1) Paperwork - As the UK will no longer be part of the customs union, extra paperwork will be required to clear the UK border i.e. a C88 SAD, an Export Invoice, an Export Packing List and potentially an Export Cargo Shipping Instruction (ECSI), a Standard Shipping Note (SSN) a Road Consignment Notes (CMR) too.
2) Customs clearance - All goods passing the new UK border will require a declaration to HMRC's National Export System (NES).
3) Zero rating your VAT - You will need to ensure you account correctly for all EU transactions, holding evidence in your accounting records to prove the transaction has taken place and keeping the official evidence of goods departure from UK shores (NES S8 report).
4) Duty Relief - Shipments to the EU will likely be available for all current duty relief schemes (provided they qualify) You will need to ensure correct accounting records of all goods and transactions you which to claim on.
Importing goods from EU countries:
1) Customs clearance - All goods passing the new UK border will require a declaration to HMRC's Customs Freight Simplifies Procedures system (CFSP) .
2) Payment of duty & VAT - In order the clear the border all duties and taxes payable must be paid immediately, unless you are entering the goods into another regime i.e. customs warehousing.
3) Duty relief - Shipments from the EU will likely be available for all current duty relief schemes i.e. IPR, RGR and End Use etc. (provided they qualify) You will need to ensure correct accounting records of all goods and transactions you which to claim on.
4) Customs warehousing - If you currently import large volumes from EU countries, but don't currently have a customs warehouse setup, this may become a consideration. While there is considerable admin involved, the long term benefits should offset this.
We recommend you take a look at our online self-audit tool, hopefully this can help you plan for where you may be spending more, need more resources or give you an idea of how you can save money by deferring or avoid paying tax and duties to HMRC post brexit.