The U.K.’s plans for an orderly exit from the European Union (Brexit) were thrown into turmoil on Tuesday when its Parliament devastatingly rejected the negotiated Withdrawal Agreement. It leaves the U.K. heading for a “hard Brexit” on March 29, imposing many new taxes and customs declarations obligations on trade between the U.K and the remaining 27 EU states. This will hit many U.S. businesses that use the U.K. as their EU gateway, but there are mitigation actions to take now to help reduce most of the downside.
However, the vote does also open the door for a postponement of Brexit, and a rerun of the 2016 exit referendum that could cancel it altogether. And the opinion polls suggest a “Remain” vote win. The next few weeks will be tense for the constitutional future of the U.K. and U.S. businesses operating from it.
Hard Brexit and actions for U.S. businesses
The U.K. voted in June 2016 to leave the EU, including its Single Market and Customs Union, the world’s largest free trade zone. The rationale was mostly about the ungated immigration that comes with EU membership.
Following this week’s vote, the default position under international public law is for the U.K. to leave the EU without a Withdrawal Agreement. Crucially, this had contained a 21-month transition to December 2020, during which existing tariff-free trade would continue between the U.K. and the rest of the EU. Instead, the U.K. will move to World Trade Organization rules and tariff rates. This will include new taxes and customs declarations being imposed on goods movements. Services are largely unaffected, although financial services and other expert services face complex changes.
For U.S. businesses, which have flocked to use the U.K. as their access point to the EU markets, this will have some dramatic effects:
New customs duties and declarations
- Goods sent from the U.K. to the EU will now become liable to irrevocable duties, on average ranging from 4 to 40 percent. This represents a prohibitive, unbudgeted cost and is already making many U.S. companies reassess their European supply chain strategies. It is important to get clear commodity code mapping on products to determine any likely tariff charges. There are plenty of helpful online tools for this.
- U.S. importers and exporters of goods between the U.K. and EU will have to complete customs declarations for the first time. While cumbersome, agents can provide this service or off-the-shelf software can be purchased. In addition, there are a range of import deferment warehousing arrangements at U.K. ports, and U.S. companies can transfer their EU-bound goods through these without customs charges or paperwork.
- Once the goods arrive in Europe or the U.K., they will face inspections for customs, VAT and regulatory compliance for the first time. U.S. companies should investigate some of the special schemes that can give “speedy boarding” to avoid this, such as the Authorized Economic Operator.
Additional Value Added Tax liabilities
- The U.K. will also leave the EU’s harmonized VAT regime, meaning U.S. companies will lose many tax simplifications that reduce tax cash flow planning and reporting obligations.
- Goods movements will also be liable to import VAT as they travel between the U.K. and the rest of Europe. This is recoverable, so it should just represent a change in tax reporting processes.
- U.S. companies selling goods online across Europe from warehouses in the U.K. will face additional foreign VAT registration obligations. So, it is important to talk to a VAT expert to determine which countries are affected. Some e-commerce companies are now setting up European shell subsidiaries to get around this requirement.
- U.S. companies that have U.K. subsidiaries, which in turn have EU VAT declarations, will also be required to appoint special tax agents, known as fiscal representatives. This only applies to 19 of the remaining 27 member states.
- Any U.S. business selling digital services (apps, download music, games, e-books, etc.) to consumers will also probably have to re-register for VAT in the EU following Brexit. This is simple, but should not be overlooked as heavy penalties will accrue if not completed.
Updating contracts and systems
- Businesses should Brexit-test their contracts with EU suppliers or customers to verify implications if no longer under U.K. law. And confirm which parties become responsible for new duties or VAT liabilities.
- It is also worth checking if the billing systems are able to support logistics, pricing and delivery terms changes on sales with the U.K.
A rerun of the referendum?
The next twist in the Brexit misadventure following the failed vote is that it does create the constitutional conditions to call for a rerun of the 2016 referendum. The U.K. government has failed to solve the Brexit Northern Ireland lock. Power over the next steps is likely to move to the members of Parliament. They would rather pass the buck back to the people and ask them to reconsider via another referendum.
If this goes ahead, the EU is highly likely to allow an extension of the March 92 date for Brexit to allow the plebiscite to go ahead. Opinion polls indicate the tiny Leave majority has now swung to Remain, in which case the U.K. would stay in the EU and try to forget the past two years ever happened!
