It’s not tariffs but more red tape that is the big danger for trade in the wake of Brexit, says FBC Manby Bowdler Brexit Director Peter Wilding. Here he explains what might lie in store for British businesses.
If the UK leaves the EU Single Market and Customs Union, the UK and the EU will treat each other as third countries.
Without remaining in the Customs Union which sets tariffs for all non-EU countries, Britain becomes Mauretania – a country which trades only according to the much-vaunted WTO rules.
A concrete and practical consequence of this is that businesses in the UK will have to face customs procedures when shipping goods to or receiving goods from the EU. In basic terms, both EU and British companies will be obliged to issue formal declarations to their respective authorities whenever goods are exported and imported.
But the real problem is leaving the Single Market which sets the rules for all internal EU trading. Currently, trade from the UK to the EU27 and vice versa is not technically considered “exports” and “imports” at all. Instead, the shipment of goods within the EU is known as “intra-community trade”. This frees businesses from a large number of administrative procedures related to compliance. In practice, the process of purchasing and selling across borders within the EU is therefore very simple.
However, deal or no deal, Britain is in for change. Red tape is back.
That red tape shock in full
The impact on businesses of these added administrative requirements is expected to be very significant in terms of time and resources.
• A report by the Institute for Government estimates that 180,000 British companies will need to make customs declarations for the first time after Brexit.
• The additional administration required to cope with this task is expected to cost UK traders around £4 billion a year.
But customs forms for new tariffs are not even half the problem. On top of this, extra costs like sanitary and phytosanitary issues or non-tariff barriers exist.
Companies are also asking for regulatory stability in order to avoid divergences that are costly and cumbersome to manage on a daily basis. Checks at borders could cause significant disruptions, additional delays, additional administrative complexity or increased costs. They advocate negotiating an ambitious agreement that includes a specific chapter on regulatory cooperation, so as to limit divergences in compliance requirements.
Why? We’re talking security controls, food safety, consumer protection regulations, environmental regulations, waste shipment, occupational health and safety, competition rules, public procurement, intellectual property rules, personal data protection and all the technical products rules that people in the automotive, aviation, tourism, pharmaceutical and chemical sectors know well.
Even a very comprehensive and ambitious post-Brexit free trade agreement between the EU and the UK will lead to some unavoidable amount of friction, such as:
• Any changes to rules in one sector also have significant knock-on effects for companies in other sectors and throughout interconnected supply chains.
• The regulatory convergence between the UK and the EU27 would not only concern regulations as such, but also – critically – their interpretation and implementation, with an adequate enforcement mechanism.
Deviation from the essential requirements, conformity assessment procedures and harmonised EU standards will introduce additional costs and complexities to operate in the UK market. UK specific product markings or other means to demonstrate conformity will create confusion and uncertainty for consumers without any benefits.
Many companies, therefore, face changes to procedures, law or formalities, eg re-classification of products, which will require changes to Organisational Planning/IT systems, which will lead to significant costs for operators.
What to do?
Companies know that no free trade agreement has to date come even close to solving any regulatory divergence question and allowing the type of free flow that they will need.
• Regulatory gaps should be avoided in areas currently covered by EU regulations, such as the "new approach" regulations (machinery, drug precursors, medicines, pressure equipment, medical devices, etc.).
• UK standardisation bodies should be facilitated and encouraged to participate actively within the EU standardisation framework.
• Existing and future EU directives and regulations governing product safety, electromagnetic compatibility, environmental and other matters of public interest should be a basis for UK legislation even after Brexit - as they currently are for other EU neighbouring countries.
• The agreement on a future EU-UK relationship must involve maximum collaboration on sanitary and phytosanitary (SPS) standards and consumer information requirements for food products
Here are four solutions:
Authorised Economic Operators
The best thing to do to reduce the burden of increased customs and compliance declarations for European and British companies is to register as Authorised Economic Operators (AEO) if you can. This is obtained on the basis of a detailed analysis of the products, procedures, and partners in order to ensure that imports, exports and customs procedures will be handled in line with customs regulations. Consequently, customs should adopt a process-oriented approach to these procedures as opposed to transaction-based approach. This approach should be applicable for as many companies as possible.
• to obtain AEO status, companies need to have a history of trading outside the EU. Companies that only trade within the single market will not meet this criterion.
• the process can easily take longer than six months so the cost and time requirement to obtain the AEO status will mean that this is not a realistic option for many SMEs.
The UK and the EU and third countries should agree on rules for mutual recognition of AEOs. This has the potential of speeding up customs clearance procedures in the future trade relations between the two parties. UK companies with AEO status currently account for around 60% of the UK’s imports and 74% of the country’s exports, according to estimates by British customs authorities.
Pre-clearance should also be explored as a possibility to prevent queues and ensure a smooth flow of goods. As many trucks as possible should be pre-cleared before they arrive at their destination. Pre-cleared cargo could exit the port immediately upon arrival through ’fast lanes’. This would minimise infrastructure needs at ports as it would avoid queues if the majority of cargo could be pre-cleared and green routed. This would be contingent upon good cooperation between EU member state authorities and UK customs authorities.
Harmonised customs arrangements
To avoid additional costs due to different product classifications, harmonised customs classifications based on the Integrated Tariff of the European Communities – the TARIC code – need to stay.
Customs declarations themselves should also be made as simple and paperless as possible, particularly in terms of the data required from both sides. This applies now under the Low Value Consignment Relief (LVCR) where cheap items can enter the EU and UK without taxes and duties payable. This will avoid adding hundreds of millions of additional annual declarations into the EU’s and the UK’s IT systems, with knock-on effects on the wider economy.
Brexit raises important questions and concerns related to VAT, particularly potential variations in VAT rates and repayment terms and time-frames. The UK import VAT regime could have an impact on the cash flow and working capital cost of businesses that could damage competitiveness and increase costs for consumers.
VAT regulations in the EU are national, based on Council Directive 2006/112/EC. A mechanism should be made available to all VAT registered companies, whereby import VAT from a third country (the UK) is paid and accounted for in a simultaneous transaction. This would minimise cash flow and working capital implications as the eligible trader could claim the VAT as an input credit at the same time as declaring VAT liability. This is postponed accounting as opposed to the costly deferred payment.
Postponed accounting is better for the use of centralised customs clearance.
Much of the commercial debate around Brexit has focused on whether we stay in the Customs Union or not. That is because this is the current battle between the Conservatives and Labour. If Labour prevailed, and the UK remains in a Customs Union, then the tariff issue dies and farmers and businesses will avoid the sometimes crippling trade taxes becoming a third country would entail.
However, the much bigger problem relates to the Single Market. Neither main party wants to stay in the Single Market because you can’t have free movement of goods, services and capital without accepting the same for people. But abandoning the single market means ripping the UK out of a continent of shared commercial rules and compliance regimes. Once out, these rules will have to be replaced, be recognised and be enforced.
If you want to import or export in future, compliance with these EU rules will require much more red tape and costs. We at FBC Manby Bowdler can help you navigate through this maze. Contact us and our team at /what-we-do/business-services/brexit-legal-advice
A Brexit case study:
Trading with Europe - from four steps to thirteen leaps
Now: Spanish company is shipping a good to a company in the UK under the current rules:
1. The British company sends an order for the desired goods to the manufacturer in Spain.
2. The Spanish company prepares the dispatch and issues a commercial invoice without including VAT, which is permitted as long as both EU companies have a valid VAT registration number, saving time and administrative hassle.
3. The product is then shipped from Spain to the UK (possibly by a freight forwarder, courier service or postal operator). There are no border checks or hold-ups on the way.
4. Upon receipt of the good, the UK company issues a confirmation to the Spanish company. The EU’s “Single Euro Payments Area” (SEPA) makes it easy and cost-free to conduct the cross-border payment for the product.
1. The interaction commences with the British company issuing an order for the desired goods to the Spanish manufacturer.
2. The Spanish company needs to send a pre-departure declaration to the Spanish customs authorities, declaring the type of product and the quantity thereof as well as the destination.
3. The company then has to wait for an approval and receive an identification number for the shipment from the national customs authorities. This is usually done electronically.
4. The good is then dispatched along with a commercial invoice, which needs to include more detailed information regarding the shipment, including identification numbers, exact description of the goods, weight and content of the package as well as shipment and possible insurance costs.
5. Documents that prove the origin of the goods may also be required. These accompanying documents are included with the physical consignment.
6. The delivery of the goods would then usually be handled by a freight forward company that deals with the actual transportation as well as subsequent declarations and customs procedures.
7. Before commencing the export, the Spanish exporting company in the example above must issue an export declaration and file this to the customs office responsible for the company.
8. After receiving approval from its customs authority, the company can ship the good while the shipment is registered in the customs export system under a special export registration number.
9. When the good reaches the EU’s external border (for instance, at the port of Calais), the export declaration (or the export shipment registration number) is provided to the customs authorities (in the case of Calais, this would be the French customs office).
10. While the goods are being transported, the freight forwarder would also issue an Entry Summary Declaration (ESD) to the port of entry. This declaration allows the customs authorities to conduct a risk assessment prior to the actual arrival of the goods at the British port or point of entry, which assists the choice of the subsequent checks and inspections.
11. Upon arrival in the UK, the goods would be declared to customs through an import declaration. At this point, the shipment would be subject to customs duties and possible import VAT that need to be paid.
12. Furthermore, depending on the goods and sender in question, as well as the aforementioned risk assessment, the shipment is subjected to checks and inspections. The time required would vary based on staff and capacity restraints as well as the type of inspection chosen. In any case, the holdup of the goods could last up to 90 days.
13. Once the necessary checks are completed and the required duties are paid, the goods are cleared to leave customs and would then be transported to the location of the British company, which issued the original order. Payment would be conducted by international transfer, which may include additional charges compared to the SEPA framework.
The cases above offer a very clear contrast between the relatively straightforward procedures enjoyed by British and European businesses today, and the risk of much more cumbersome and costly customs procedures that could become a reality after Brexit.
What’s happening across the Channel?
• In the Netherlands, 30% of the value of Dutch trade with the UK is made by 35,000 businesses which have never had to deal with customs procedures. The number of annual entry customs declarations is expected to increase by 1.5 million and the number of exit declarations by 5 million once the UK leaves the EU Customs Union.
• In Germany, the Association of German Chambers of Commerce and Industry estimates that for German-UK trade alone, an additional 15 million customs documents will be necessary, resulting in an estimated annual cost of 500 million euros.
• In France, the business community anticipates 1.2 million to 2 million new import and export declarations, and will recruit approximately 700 to 750 new customs officers by 2020, with 250 recruited in 2018.
• In Ireland, 91,000 companies trade with the UK. Their customs declarations are expected to increase by up to 800% after Brexit.
• In Finland, annual import and export declarations will increase by 230,000 and 36,000, respectively. This additional paperwork alone could cost Finnish companies as much as €115 million annually.
Here at FBC Manby Bowdler we have a stellar team of experts on our dedicated Brexit Advisory Team who can help you take control of your business whatever the politicians decide.
If you would like to contact Peter or the rest of the team to discuss any of the above please call 01694 724440, 07901 008220 or email firstname.lastname@example.org.