2020 has been a year dominated by Covid-19 and the impact it has had on both the health and wealth of the nation. However the shadow of Brexit has re-emerged from the gloom and time is running out before it finally takes effect. From the 1st of January 2021 the UK will fully leave the EU and this time there will be no extensions or transition periods.
A customs border will be put in place between the UK and EU for the first time since 1992 and customs import/export formalities will be required for movements of goods. Moreover, in the likely event of a “hard” Brexit (ie no Free Trade Agreement in place by the 1st of January) customs tariffs will apply on the import of goods.
The Impact of Brexit
Understandably, for industry sectors like the drinks industry where certain products have high duty rates, the focus has been on the additional costs of tariffs in the event of a hard Brexit. The EU’s customs union has meant that movements of goods to and from the UK have not had to deal with such standard cross-border costs for almost 30 years. From the 1st of January the responsibility will now be on the importing entity to pay these upon import but the implications for overall landed costs and competitiveness will impact the whole supply chain.
What has not been emphasised enough though is the costs of general import/export compliance. Customs declarations will become mandatory for all imports/exports to/from the UK. These are legal documents with tax implications (directly on customs duty, excise duty and import VAT and indirectly on transfer pricing and corporation tax considerations). The time, resources and costs that businesses must invest to ensure operational and compliance readiness for the extra volume of imports/exports post-Brexit is often overlooked.
Irish Revenue have recently issued a survey to understand the level of readiness within the business community amid concern that too many businesses are not operationally prepared for Brexit.
What businesses need to concentrate on
There’s still a lot of uncertainty and noise around Brexit: in particular, the progress of the ongoing Free Trade Agreement negotiations and the lack of clarity on how the Northern Ireland Protocol will operate in practice. However there is clarity on other points and it is these that Irish businesses should be concentrating on from now until 1 January.
Regardless of the result of the Free Trade Agreement negotiations the following is clear:
- In Ireland, full import/export customs formalities will be required for movements of goods from and to the UK from the 1st of January
- In the UK there’s a staged introduction of full customs formalities for EU imports. However for alcohol products (as with other excisable products) there’s no postponement and full import/export customs formalities enter into effect from the 1st of January.
The priority should be to ensure operational and compliance readiness for the 1st of January. The Covid-19 second wave may be top-of-mind but Brexit planning needs to be an integral part of planning over the next month.
Irish businesses need to prioritise business continuity. There are four “must-haves” to avoid stop-ships:
- Customs Registration (EORI): if not already in place, this is a simple but essential step to ensure businesses can interact with Irish Customs and import/export goods as required
- Customs Payment Facility: if not already in place, this is an essential step to ensure payment of all relevant import taxes (customs duty, import VAT and excise duty). The easiest method is by means of a deferred payment facility which allows for automatic payment of all applicable import taxes deferred until the following month. If already in place, the level of guarantee should be reviewed to determine if it is sufficient to cover all the additional UK imports post 1customs duty, import VAT and excise duty on the 1st of January
- Customs clearance: if not already in place, businesses or their representatives (customs brokers) should be set up to accurately complete all required customs declarations. This is important as customs declarations have legal effect and so accuracy is important to avoid underpayments of tax, interest, penalties and increased scrutiny from Customs. Also, exports to the UK will need to have customs invoices to facilitate clearance into the UK so it is important that businesses have the facility to create these for all future UK shipments
- Supplier/Customer readiness: even if businesses are ready, are their suppliers and/or customers? This should be checked in order that there are no business interrupts up/downstream in the supply chain. Moreover, contractual arrangements/incoterms with suppliers/customers in the UK will now determine responsibility for customs clearance – are businesses comfortable that suppliers/customers are in a position to do so where required post-Brexit? Depending on the circumstances it may be more prudent to take on greater customs responsibility to reduce the risk of supply chain delays (although the excise impact of this may make this unfeasible).
Up to now, customs compliance information (such as tariff classification, country of origin) needed to be recorded for statistical purposes only ie on Intrastat returns. However, post 1 January this must be accurately reported on customs declarations with tax implications for any errors.
- With the additional customs declarations for UK goods movements comes the responsibility for correct completion. These are legal documents that must be completed correctly to meet tax and regulatory requirements. In particular, for imports, errors on the main duty drivers (tariff classification, customs valuation and country of origin) can lead to underpayments of import tax and the financial and reputational damage that results. Customs also have the right to levy administrative penalties for serious or continuous statistical errors
- Irish businesses need to put in place robust written procedures to deal with the additional customs burden to both address the compliance challenges and to show Revenue the intent to do so (in the event of an audit). This is of most relevance for the duty drivers: tariff classification determines the duty rate (are businesses confident their products are classified correctly both for customs and excise purposes); customs valuation determines the duty base (usually the sales price suffices but, for sales between related parties, evidence that this price is at arm’s length will be sought) and origin (this will be particularly important in the event of any EU-UK Free Trade Agreement to avail of 0% tariffs for qualifying goods)
- Resources may already be stretched due to Covid-19, but the additional compliance work above needs to be considered
- If a customs broker is being used to complete customs declarations, it is important that they are properly instructed as they will be acting on behalf of the actual importer who is normally ultimately liable.
Customs duty mitigation
This is relevant in the event of either a hard Brexit or a Free Trade Agreement.
- If and when an EU-UK Free Trade Agreement is agreed, businesses need to ensure their products qualify for the duty reductions and obtain the proof of origin to get the actual benefits
- If not, there are other duty planning ideas that may be applicable to Irish businesses depending on their supply chains. These may allow them avail of existing EU Free Trade Agreements or custom duty suspensive procedures for goods stored or manufactured under customs control.
Issues specific to the Drinks Industry
The main additional impacts of Brexit for alcohol products will be on:
- Systems: businesses need to be ready for the systems changes required when the UK leaves the EU (eg duty suspended movements via the Customs ‘AEP’ system for exports rather than EMCS)
- UK 6-month Brexit easement does not apply: the much vaunted 6-month easement program postponing the requirement for full customs declarations and payment of customs duty does not apply to excisable products. The 1st of January is still the drop-dead date for full customs formalities and tariffs for alcoholic beverages.
What is a “must-do” in the time remaining?
The impact of Brexit will be huge on Irish businesses with or (especially) without a UK-EU Free Trade Agreement. The focus needs to be on prioritising operational compliance and systems readiness to avoid business interrupt. This will be more of a challenge with resources already under strain dealing with Covid-19, but the 1st of January is now the immovable date for closing time on the UK’s membership of the EU.