In June 2016, we blogged that the referendum result for an EU exit meant the UK would actually have to remain in the EU for the foreseeable future. Over 4 years later and "remaining" is finally coming to an end! We are gradually edging closer to an answer to "what does Brexit mean for the UK?"
Here's a brief recap of where we're at. Whilst the UK formally left the European Union (EU) on 31 January 2020, we're currently in a transition period till the end of 2020. This means at present we remain aligned to EU rules and regulations as before. Talks as to what the UK's relationship with the EU will look like from 1 January 2021 remain on-going which adds uncertainty regarding future trade.
The hope is that both sides will still manage to strike a free trade deal despite differences in negotiations. However, businesses would be wise to plan for a worst case scenario before the end of 2020. In this blog post we review the key areas impacting SMEs and provide guidance as to what owner managers can do to prepare for no-deal.
Owner managers would be wise to review the following for potential insight as to what Brexit means for UK SMEs:
At present the UK trades tariff-free with EU member states.
What will Brexit do, if we leave the EU with no-deal? From 1 January 2021 UK trade with the EU will take place under World Trade Organisation (WTO) terms. This will mean the application of EU tariffs and customs checks. The result could be more paperwork and potential delays at borders which might push up the prices of goods and services.
The Confederation of British Industry (CBI) projects that in the event of a no-deal, 90% of UK goods exported to the EU would be subjected to tariffs. Each WTO member country has a list of tariffs and quotas that they apply to the countries they do trade with. You can check the UK trade tariffs that will apply from 1 January 2021 here.
If you have suppliers from the EU then tariffs and quotas will be applied to those goods/services coming into the UK. If you sell into the EU then your goods/services will be subject to the EU's application of what's known as its “third-country” tariffs and quotas.
This means selling into the EU from the UK could be hit by significant taxes. To get a feel for what this cost could be, the bloc’s average WTO tariffs are:
Some manufacturers could see a 10% tariff on exports to the EU. In the case of car manufacturers, The Week reports, WTO tariffs on car sales into the EU could amount to €5.7bn per year. The consequence would be the average price of a British car sold in the EU would increase by €3,000.
Without a deal, the UK would have to trade with every WTO member in the world on the best terms it could/can offer any member, including the EU.
EU members are required to apply a common set of VAT rules. A no-deal Brexit leaves the UK open to decide when VAT applies to transactions and at what rate.
There will be significant procedural changes to how goods are exported to the EU. Check the below table for how the process currently works and could change if there isn't a trade deal.
|VAT: What will happen with Brexit?
|Current arrangements for exporting goods to Germany||A no-deal scenario for exporting goods to Germany|
1. The sale is zero rated by the UK business, meaning it reports no VAT on its UK VAT return.
|1. The sale is zero rated as an export.|
2. A VAT invoice is issued with the German customer's VAT registration number.
|2. An export declaration has to be made.|
|3. VAT is declared by the German customer on their German VAT return.||
3. An import declaration is required at Germany and import VAT is payable as the goods enter the country.
4. British business submits EC Sales List, a report of all sales into the EU.
|4. Other customs duties will also be payable. There will be no requirement to complete the EC sales list.|
|5. The submission of Intrastat declarations reporting the nature and values of such shipments to the EU, subject to the Intrastat value threshold.||
5. The UK supplier may have to register for VAT in Germany. This depends on who acts as the importer of record. If it is the German customer then there is no VAT liability. But if that's not the case then there's the need to register for VAT in Germany and pay the liability on the sale.
UK exporters of goods will likely face a stark choice. They'll likely look to deal with the task of importing into the EU. It's unlikely their customers will want to process such imports, especially if they can find an alternative supplier within the trading block. Potentially, this means UK businesses having to register for VAT in an EU territory which in turn will increase their costs.
Continuing to sell services into the EU may be simpler than exporting goods. VAT treatments are likely to remain the same and B2B sales shouldn't result in a local VAT registration obligation. For B2C sales, liabilities are likely to remain similar but with changes to procedure.
The Mini-One-Stop Shop (MOSS) package accounts for all EU VAT through a single UK portal where you supply services into the EU. MOSS is unlikely to be available in the UK post-Brexit. This means businesses may have to register for VAT in every EU country in which they supply services or register under a non-union MOSS scheme in another Member State.
Will the EU allow UK service providers the right to sell services into the EU, unless they create local establishments in EU member states to make those supplies?
Exporting to the EU
UK-EU trade has been tariff-free for a long time. Being a member of the customs union meant UK exporters traded to standard EU rules. Imports and exports therefore crossed the borders freely with no need for paperwork or checks. A no-deal Brexit would see the EU impose a border on British exports from 1 January 2021. This could lead to checks and potential queues resulting in delays.
Say you supply meat products such as chicken and eggs to an EU member state then in 2021 you may need to submit paperwork. This would be to prove the food complies with the quality and health standards set out by the EU. Then, depending on their classification, you'd have to pay tax and duty on the goods. Will you absorb these additional costs yourself or risk a reduction in sales by hiking up the price for which you sell them to customers?
It is rumoured the French plan to implement post-Brexit border controls at their ports immediately in a no-deal event. Meanwhile the Financial Times reports that HMRC has estimated that British businesses would spend £15bn extra a year on paperwork as a result of no-deal.
Conduct an audit of your contracts to understand which of your goods or services are supplied from the EU. It might be wise to then reach out to those in the EU to understand what their plans are post Brexit.
Some questions to ask them might include:
If you're not convinced your supplier is sufficiently prepared for Brexit then it's time to look at alternative options. The plus side to this is it's often good business practice to review suppliers, and assess risks and costs with a view to achieving savings and efficiencies.
If you haven't done so already then check your UK based employees as to whether they are citizens of:
Where this is the case, they will need to register for what is known as settled status in order to continue working and living in the UK after 30 June 2021. Successful applicants will be given a settled or pre-settled status.
If you're looking to sponsor your worker(s) then a new points based system will apply to EU and non-EU migrants from 1 January 2021.
The UK is creating new regulations that will run in parallel with the EU. Historically the UK, as a member state, had to recognise EU regulations. This was because EU regulations have to be enforced in law by all member states. Such regulations cover all sectors and industries and this means a significant area of change could be the storage and handling of data.
The UK is part of the mutually agreed General Data Protection Regulation (GDPR). This enables personal information gathered in other GDPR-protected countries to enter the UK with no barriers because all data is equally protected between countries.
The default position of the EU, after 1 January 2021, would be to handle data transfers to and from the UK in the same way as for non-EU countries. The UK would no longer be bound by GDPR and could deviate from these standards if Parliament decrees it. Consequently the UK could be subject to adequacy decisions by the EU, otherwise data can't flow freely from EU countries into the UK.
The hope is the EU will make an adequacy evaluation of the UK during the transition period, however, this is not guaranteed. Where an adequacy decision isn't made, GDPR transfer rules apply to data coming from the European Economic Area into the UK. This means the UK will have to continue to align with GDPR so that data from the EU can continue to transfer into your business website and/or servers in the UK.
You need to check where your cloud data is stored and if it's in the EU. In the event this is the case, transfer your storage to the UK before the transition period ends. Things like privacy policies, terms and conditions, and contracts may also need revision post-Brexit.
British businesses would also be advised to keep abreast of this situation by reviewing the website for the UK Information Commissioner's Office.
No-deal could result in the need for the storage of goods and products to prevent against possible delays at borders. This combined with new tariffs and potential currency volatility could add significant extra costs to doing business and impact on the flow of money coming into your business. Delays at borders could in turn lead to delays in making payments.
In the short term therefore you may need additional funding to boost cash flow and continue trading. To understand the potential impact on your cash position it would be wise to create a number of scenarios combined with cash flow forecasts. This will allow you to understand key points of vulnerability in your business.
Then, consider all the finance options. Remember raising finance can take time, and will require documentation of historical trading as evidence that the business is heading in the direction that you claim. This highlights the need for accurate reporting and having a robust back office finance function in place to ensure you have accurate numbers.
You will also need to consider what level of risk you're comfortable with taking on. During these difficult times potential funders may look to secure loans against assets that you may own, namely your property. Finally, it might be wise to potentially lock in currency prices at current rates to provide you with some certainty and protection against short term fluctuations.
The content of this post was created on 20/10/2020.
Please be aware that information provided by this blog is subject to regular legal and regulatory change. We recommend that you do not take any information held within our website or guides (eBooks) as a definitive guide to the law on the relevant matter being discussed. We suggest your course of action should be to seek legal or professional advice where necessary rather than relying on the content supplied by the author(s) of this blog.