Brexit – An uncertain future or a brave new world?

By | 22 February 2018
by Ruth Corkin

It is virtually impossible to avoid Brexit these days. The UK’s exit from the EU is probably the most fundamental change to our legal and trading system since the UK entered the “Common Market” in the 1970s.
We still have little idea what will happen on many important areas such as human rights, safety standards and trade tariffs, but we do know that there will be strong resistance to change, good or bad, and if businesses who want to do business in Europe they will have to meet EU standards.

And what about trade? Let’s be clear here. When the UK exits the EU on 29 March 2019, it will become a “third” country and the rules that apply to such countries will prevail. But what does it mean? We could join countries such as Norway, Switzerland and Lichtenstein and become part of the European Free Trade Area (“EFTA”). That would bring some parity with the EU countries and access to the “Single Market”, but would also mean accepting some jurisdiction from the Courts of Justice of the European Union, the freedom of movement of people and goods and a financial contribution. All issues that fuelled the vote to leave the EU in the first place.

So where does this leave the UK? A bespoke exit deal is currently the stated aim of Theresa May’s Government. No trade tariffs, retention of the current VAT simplifications, responsibility for our own immigration and border policies, and negotiation of our own trade agreements have all been touted as components of this “agreement”. But can this really be achieved, or will the UK reach an impasse and have no deal at all? Or will Theresa May swap the box in the last round and gamble that her swap has something better in it? (For those fans of the television programme “Deal or No Deal”!)

Whatever the outcome, businesses should be looking at supply chains now. There are avenues to explore that may be the same whatever the outcome. Even if you do not import or export yourself, your supply chains will almost certainly have import and export issues.

Let’s look at a practical example of dolls valued at £10,000,000 being imported from China. The UK VAT rate post Brexit is assumed to remain at 20% and the Customs Duty rate remaining at 4.70% for dolls.

For example, Company A only sells the dolls in the UK. The goods come into the UK as first point of entry into the EU. Import VAT and Customs Duty is due and paid. Will Brexit affect Company A? Well, no, as the goods are not being bought or sold in the EU. Company A’s VAT bill is £2,000,000 (recoverable via the UK VAT return) and its duty bill is £470,000.

Company B brings the same products into the UK from the same supplier, but distributes the toys to business customers in the EU, with no UK sales. Title to the goods passes on delivery to the customers in the EU. Company B will be affected by Brexit, as it could face duty payable in every EU country it sells as it owns the goods at the point of sale in an EU country. Company B’s VAT bill in the UK will be the same as Company A, but its EU VAT bill will vary from country to country (and it will have register for VAT in individual EU countries to recover it). Its UK duty bill will be the same as Company A and its duty bill could be an additional £470,000. Company B may be better setting up a new entity in an EU country to avoid double duty and VAT. However, this may mean increased employment and handling costs.

Company C operates a hybrid of the two distribution models of companies A and B. Company C will also be affected by Brexit on the part of the business in the EU. If Company C imports all of the dolls into the UK and exports dolls valued at £4,000,000 to the EU, its UK VAT and Duty will remain the same. Its EU VAT will vary from EU country to country and it faces the possibility of registering for VAT in multiple countries. Its EU Duty bill would add an additional £188,000. For the EU trade, Company C may also want to set up an entity in an EU country to avoid the potential for double duties and VAT. This would mean, of course, splitting the supply of the products from China between the UK market and the EU market, leading to a potential increase in transport costs, employment and handling costs.

In the last two scenarios, there are a number of unknowns and it is important that these are explored and costed before final decisions are made. The EU country of choice may be that with the lowest VAT rate (the duty rate should be uniform), but this may have increased linguistic and compliance issues.

For example, Germany has a lower rate of VAT than the UK. Logistics are well organised and serviced warehouses are a plenty. However, there are 13 VAT returns to file (12 monthly and one annual return). Penalties for getting things wrong tend to be higher and most of the forms are in German. Then there are social taxes and business taxes to consider. Corporation tax in Germany varies between 22% and 36% due to trade taxes administered at a local level and Income tax has a range of 0-45% plus 5.5% solidarity tax. (Whilst the income tax brackets are similar to the UK, the 5.5% additional tax makes employment more expensive)

Contrast this with Ireland. The VAT rate is higher, but the compliance is only slightly more than the UK (6 VAT returns). It operates a lot of its VAT rules in a similar way to the UK and business is conducted in English. Corporation Tax is at 12.5% if conducting a trade and income tax is from 20-40%, with 20% being paid on income up to €33,800 (approximately £29,500) and the higher rate being due on income over that amount. 

Maybe the UK will pull the rabbit out of the hat and negotiate an extension of the current Union Customs Code (“UCC”) and a VAT union, which may help our companies B and C. Stranger things have happened and Norway is currently looking to improve its deal with the EU. As my old Mum used to say “Prepare for the worst and it can only get better!” If nothing comes of today’s planning for disrupting the supply chain because the UK gets it fabulous trade deal, what have companies B and C lost? Some costs on exploring the alternatives and potentially on setting up an entity in the EU perhaps? But what if the UK leaves the EU with no deal? What have businesses B and C gained? The security of knowing that they can move agilely to ensure a smooth transition of their own trade after 29 March 2019!

One last word on trade deals. Much has been said about the fact that the EU has negotiated trade deals as a trading block and the UK has benefitted from this. Less has been said about the fact that the UK has also negotiated some of these deals as an individual signatory as well. Existing trade deals with Canada and South Korea, for instance may allow for the UK to continue as is post Brexit. Similarly with trade deals with the World Trade Organisation (“WTO”) and General Agreement on Tariffs and Trade (“GATT”) countries. How would this benefit the UK? Well if, for example, South Korea is currently allowed to import a quota of small cars into the UK, but in return has to accept a quota of German cars as the trade deal is an EU one, post Brexit, South Korea may no longer has to accept the quota of German cars, because it can trade with the UK under the UK’s separate signature to the global trade deal. South Korea may then accept a quota of UK cars instead of German ones. The gain is to UK exports and the loss is to Germany!

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