In this Brexit blog originally published by Causeway, RSM offers a reflection on practical implications of the Free Trade Agreement struck by the UK Government with the EU. RSM’s Jim Burberry (RSM UK) and Paddy Stapleton (RSM Ireland) outline the VAT and customs duty considerations for the UK, Northern Ireland Protocol and the Irish Republic and how RSM can help.
Well we now know as a result of the announcement on Christmas Eve last year, that the UK has struck trade deal with the EU. A so called Free Trade Agreement (FTA). The FTA means no tariffs or quotas will be introduced for the import and export of goods between the UK and the EU, but with due deference to the arrangements necessary for goods moving to and from Northern Ireland under the Northern Ireland protocol. UK and Irish businesses may well have breathed a sigh of relief on hearing this news, but what does this mean in practice from a customs perspective, and what challenges are likely to arise in the coming months?
The 1,246-page EU-UK Trade and Co-operation Agreement, which came into effect on 1 January 2021, includes relatively few provisions related to customs, but is nevertheless a highly positive development for UK businesses trading in goods with the EU.
The main benefit of the deal is that there will be no customs duty payable on trade in goods between the UK and EU provided those goods are of UK/EU origin. This is vital as a no-deal scenario would have seen the price of many goods inflated by UK and EU tariffs as they crossed the border. However, businesses must be able to demonstrate that their goods meet the new rules of origin laid down in the agreement. The fact that goods are merely being shipped from either jurisdiction will be insufficient to qualify for tariff-free access.
It is also important to note that the agreement does not remove the need for border checks or for importers and exporters to make customs declarations when moving goods to or from the EU. These are still expected to be considerable logistical and administrative burdens for businesses. That said, the biggest benefit of the deal may be that its very existence indicates both sides are willing to try to make the new border arrangements work. This may in itself be enough to reduce the risk of serious blockages at ports and airports.
An additional but inevitable consequence of any tariff-free trade deal on goods is that the UK has committed to maintain many common standards with the EU. Once Brexit’s strongest supporters in the UK have seen the practical implications in their areas of interest, they may put pressure on the UK Government to renegotiate parts of the deal.
Even with the removal of customs duties there will still be plenty of additional paperwork related to customs procedures that were not previously necessary on EU trade. Many businesses will have to adapt their VAT accounting on goods and services to implement the post-Brexit trading picture. There are already signs that some smaller vendors in the EU have decided to suspend their supplies of goods to UK customers, and many UK SMEs may also opt to avoid the red tape and concentrate on the domestic market.
As regards the practical implications of the Northern Ireland Protocol, there has been a virtual blizzard of legislation and accompanied by almost daily briefing documentation and updates from the UK Government to businesses moving goods to and from Northern Ireland to implement the necessary arrangements of the Withdrawal Agreement to ensure a frictionless Border between Northern Ireland and the Irish Republic and unfettered access for Northern Irish businesses to markets in Great Britain. An example being the impact on the second hand car market in Northern Ireland, where it was previously explained in HMRC guidance that used car stock purchased in Great Britain for sale in Northern Ireland would no longer be eligible for the second-hand margin scheme, requiring 20% VAT to be charged on the full selling price of the used vehicle in Northern Ireland. Further guidance has now been issued stating that the margin scheme can be used again, albeit with yet more guidance on the mechanics still to follow. This, and other measures needed to maintain unfettered access to markets for Northern Irish and Great British businesses, show the challenges for the UK and EU of finding solutions to practical issues of goods arriving into Northern Ireland from Great Britain. Critically, any solutions must ensure the customs controls between the EU and Great Britain can’t be circumvented as a result of routing goods via Northern Ireland.
For Irish businesses, while the Northern Ireland Protocol and the FTA secured tariff free trade and the continuation of a border-free Island, delays experienced in the early weeks of 2021 speak to the fact that businesses on both sides of the Irish Sea are struggling to get to grips with new requirements on the importation of goods to Ireland from Great Britain or exports from Ireland to Great Britain. This is consuming the capacity of finance and trade teams, with many business still very much working on reconfiguring supply chains, where required, to continue a smooth trade flow. This was inevitable in moving from trading with the UK as part of the EU, to now trading with the UK as a third country and its indigenous businesses in Great Britain and Northern Ireland.
For importers of goods to Ireland, a significant positive development was the well flagged introduction of Postponed Accounting for import VAT, as announced by the Irish Tax Authorities on 21 December. This provides an essential cash flow relief to importers, moving importation VAT from being paid on entry to Ireland to a self-accounting mechanism in the importer’s Irish VAT return, thus meaning no cash flow cost for importers operating with full VAT deductibility.
We continue to monitor the practical implications for businesses arising from the FTA and NI Protocol. As with any agreement involving significant compromise on both sides, both will certainly face some tough tests over the coming months and longer term.
As published by Causeway Ireland Scotland Business Exchange