The U.K. and the EU have a plan in place to avoid tax and customs problems for multinational companies post-Brexit—for now.
Both sides agreed on an 11-month transition period after the U.K. officially left the bloc Jan. 31, ending a 47-year membership in the single market. During this period, trade and customs rules for companies will remain as they were before Brexit.
But the U.K. business community is worried that the country’s largest European trading partners, such as France and Germany, aren’t preparing a backup plan in the event trade negotiations fall apart.
Without such a plan, businesses may have to pay value-added taxes and customs duties at the border for the first time. They could also face long delays at the border, according to practitioners.
“What is at stake is friction for traders moving goods between the EU and the U.K., which will put at jeopardy the 640 billion pounds ($831 billion) trade,” Alex Altmann, tax partner with law firm Blick Rothenberg and chairman of the British Chamber of Commerce in Germany, said Feb. 4. He was speaking at the Business Exchange Conference in London.
The U.K. has adopted “transitional simplified procedures” to make it easier on companies that are importing goods from Europe. Under the rules, U.K. businesses have six months from the time goods arrive to pay import duties and submit customs declarations. Only a handful of EU members, such as Ireland, have promised similar plans for businesses affected by Brexit, according to practitioners.
“The U.K. has been very pragmatic, adopting postponed accounting so that importers don’t have to pay value-added tax at the border,” said Altmann.
“We need a lot of pragmatism and help for businesses on both sides, and that goes for the EU just as much as the U.K. Politicians in the EU are saying that we are well prepared for no deal and this is something we should really worry about,” Altmann said.
For car manufacturers that run “just-in-time” supply chains, where goods are delivered as they are used in the manufacturing process, delays caused by customs and VAT declarations at the border could be very costly, said Konstanze Scharring, director of policy at the Society of Motor Manufacturers and Traders.
“Friction-less trade might not be the priority for this government, but as friction-less as possible is in both sides’ interest. So, we will be arguing for a deal which will deal with all the holdups at the border,” she said.
“You need to do as much as you can away from the border so that traffic flow is at the level that can enable just-in-time supply chains,” she added.
Even if the EU and the U.K. have a trade agreement, other barriers could result from their negotiating positions. The U.K. has said it won’t align with EU rules in a dynamic fashion, on areas such as labor, environment, and taxes.
Practical Tax Policy
Governments will need to temper the need to ease business concerns against the cost of imposing tax measures designed to minimize Brexit trade issues. Delaying when a company must pay import VAT will come at a cost, said Richard Asquith, vice president of global indirect tax at software company Avalara.
“I estimate the cash-flow cost for the U.K. will be an estimated 7 billion pounds annually, which is effectively a credit line to non-EU countries who will also get this benefit,” he said.
The U.K. previously delayed accounting for VAT, in the 1970s, but dropped the policy after many EU companies took advantage of the cash-flow benefit using the U.K. as a port of entry for goods destined for other EU countries.
Despite the cost, other EU countries, such as the Netherlands, Romania, and Belgium, already have similar measures. Ireland has also promised to implement delayed accounting for VAT.