By: Dan Hobbs, Tax Partner at Carpenter Box,
A worrying trend is emerging in the UK economy following Brexit: British businesses are struggling to attract overseas customers.
According to a study by the Office for National Statistics (ONS) on the impacts of EU exit (and the coronavirus) on UK trade in goods, total trade in goods with EU countries decreased by 23.1% comparing quarter one 2021 with quarter one 2018.
Between quarter four 2020 and quarter one 2021, total trade in goods with EU countries, excluding precious metals, decreased by 20.3%.
When it comes to non-EU countries, total trade has decreased by 0.8% comparing quarter one 2021 with quarter one 2018.
This phenomenon is causing the UK’s export performance to slip behind other developed nations, many of which are now experiencing a strong global goods trade rebound to pre-pandemic levels. In comparison, the UK’s export volumes are low as the figures above show.
Part of the reason is the shipping arrangements and costs for companies needing to ship goods abroad after the UK’s exit from the European Union, EU Customs Union, single market and VAT area.
The Trade and Cooperation Agreement (TCA) sets out the terms of UK trade with the EU from 1 January 2021.
Even if companies shipping to the EU get things right, exporting can still be a complicated process. The costs are often manageable – however, the time and monetary consequences in the form of financial penalties for getting things wrong can be severe. For instance, in some countries the penalty is 100 per cent of tax due plus interest.
There are a number of core issues for British companies to consider, not least that goods moving in and out of the UK are classed as a formal export. Before, there was no trade border with the EU, so goods could move freely in and out and compliance procedures were limited.
Now, shipments must go through customs and require formal import and export procedures and documentation, such as commercial invoices, which describe the goods and their value to help determine the customs duties to be paid. Businesses need to include these with shipments crossing EU borders (and borders of countries outside the EU).
Depending on the country they are shipping to, British businesses need to identify the correct processes and ensure they follow them.
Also, prior to Brexit there were no custom charges or duties to be paid on goods shipped in and out of the UK. Now, companies needing to transport goods to the EU must pay duties to the tax authorities of the specific country they are heading for. These are driven by tariff codes and each country has their own set of procedures and processes, so careful planning and research is required.
To make things even more complicated, the UK has new procedures and processes, too. These aren’t yet fully developed – although the government recently announced a timetable for introducing import processes, with full customs control effective from 1 January 2022.
There are, however, steps that businesses can take to make things easier for themselves, as well as engaging a good accountant of course!
Register for an Economic Operator’s Registration and Identification (EORI) number:
This is a unique ID used to track customs information in the EU and is critical for accessing EU markets post Brexit. It means businesses can simplify customs processes, avoid delays with goods moving across the border and prevent additional costs racking up.
To obtain an EORI number, businesses must have an established premises in the country they want to import to or export from, the UK in this case. They can use it to make customs declarations, appoint someone to deal with customs on their behalf and apply for a customs decision.
For more information, or to apply for an EORI number, visit the government’s website here: https://www.gov.uk/eori
Correctly manage EU valued added tax (VAT):
It is important that businesses understand who is liable for VAT. Those exporting into the EU from the UK on their own behalf, i.e. in accordance with International Chamber of Commerce (ICC) rules (known as Incoterms), are liable for duty and import VAT. Companies delivering direct to customers, require an EU VAT registration.
When the UK left the EU on 01 January 2021 it also left the EU VAT regime, resulting in a number of changes. Exports within the EU are now treated the same as exports outside the EU, which means they should be zero rated for UK VAT.
This is the same whether companies are shipping business-to-consumer (B2C) or business-to-business (B2B). They don’t need to comply with distance selling regulations or verify the VAT status of their customers.
However, B2C exporters need to check the requirements of the countries into which they are shipping and register for EU VAT if applicable.
Companies must remember that zero rating goods for VAT means no VAT is payable (they just apply a 0% rate), but the exports must be included as part of their VAT accounting.
In addition, the EU introduced new VAT rules for e-commerce retailers on 01 July 2021. These include a ‘one stop shop’ (OSS) for VAT accounting on B2C services and EU sales of goods.
This removes the requirement for businesses to have multiple VAT registrations and reporting obligations in the EU, providing that the goods are only sold and not stored in several countries at once.
Furthermore, country-specific VAT thresholds have been scrapped and replaced with an EU-wide distance selling threshold of €10,000. Companies exporting less than €10,000 worth of goods can pay the VAT due in the UK at the UK rate. If they export more than €10,000, VAT is due in each of the countries they are selling into.
This means they either need to register for VAT in these countries or use the OSS as detailed above.
Classify goods and claim for preferential duties (if applicable):
Traders must now submit customs declarations for all goods exported from the UK. They are responsible for classifying their goods and recording their origin. Although traders can classify goods themselves, it is recommended to use a customs intermediary, as incorrectly classifying goods can lead to the wrong amount of tax or duty being charged.
If goods originate in the UK (as the exporting country), companies sending them to the EU and releasing them to free circulation might be able to claim a preferential rate of duty – meaning they’ll be free of customs duty. This is also the case when importing goods originating in the EU to the UK.
However, exporters will need to declare proof that the goods comply with the ‘rules of origin’, which determine the economic nationality of goods based on where the products or materials used in their production came from. They are quite complicated, but a handy guide can be found here: https://bit.ly/3rjhdZv
Proof comprises a statement on origin, drafted by companies shipping goods to the EU using their EORI number and issued to the customer. Statements on origin must be included with invoices and other commercial documents and must describe originating products in sufficient detail to enable their identification.
For more information on preferential duties and to find out how to make a claim, visit the government’s website here.
To conclude, however, there is no substitute for getting the appropriate specialist advice when it comes to negotiating export processes following the UK’s exit from the EU.
For more information on Carpenter Box’s tax services get in touch on 01903 234094 or visit https://www.carpenterbox.com/contact-us/.