As the EU/UK post Brexit negotiations continue, many Irish businesses are still considering how to plan for an unknown outcome. Indeed, many Irish businesses have put off making detailed plans until the outcome of the current negotiations is known.
From an Irish tax perspective, implications can arise in relation to both direct taxes (corporation taxes) and indirect taxes (VAT/customs). In this article, we discuss what Irish businesses should be considering at this point, in relation to indirect taxes.
1. Overview of possible future landscape
- If the current negotiations between the EU and the UK do not lead to a free trade agreement (“FTA”), the basis of trade between the EU and the UK from 1 January 2021 is expected to be based on World Trade Organisation (“WTO”) rules. The implications of this outcome likely to be as follows:
- Movements of goods between the UK and EU will no longer be treated as “intra community movements”, and instead will become imports and exports, similar to the current import/export characterisation of the movement of goods between the EU and non-EU countries.
- The administrative burden for businesses could be significant in some cases.
- Direct costs for some businesses are likely to increase in the form of tariffs and administration costs.
- Hidden costs of doing business may arise. For example, the absence of an FTA may impact businesses where products are imported into the UK from countries with which the EU currently has an FTA.
- Cross border checks may be a major disruptor of logistics triggering a chain reaction resulting in increased costs, reduced service levels and disruption.
- Delays may materialise not just at customs checkpoints, but within companies getting ready for such checks. Therefore, securing Authorised Economic Operator (“AEO”)/Trusted Trader may become a necessity for businesses. AEO is an EU wide scheme, open to “trusted traders” who can demonstrate consistent compliance and trustworthiness to customs authorities in their supply chain operations. Obtaining AEO status can significantly mitigate non-tariff costs associated with international trade.
- From a customs and trade perspective, the three main areas to consider are:
- Cost impact of duty – The country of origin of goods is a factor in determining the amount of customs duty payable. Reduced customs duty rates apply to EU imports from countries that have trade agreements with the EU, and preferential origin rules in these agreements are used to determine the country of origin of the imported goods. In the absence of an EU/UK trade deal, such preferential origin benefits would not apply to imported goods from the UK, leading to higher customs rates in certain cases, when compared to preferential original situations.
- Lead times to market – Businesses must consider the effects of customs requirements on lead times.
- Compliance costs – Import and export customs compliance costs will require consideration. These may include - VAT registration, putting bank guarantees in place for VAT deferred payment situations, and consideration of demurrage/storage costs.
- In relation to possible Brexit outcomes:
- If there is no trade deal, and EU/UK trading becomes based on WTO rules, tariffs will apply to goods, customs borders and administration compliance issues will arise, there are risks of customs borders delays and backlogs, and possible import VAT.
- Even if an FTA is agreed between EU/UK, while no tariffs should arise, customs borders and administration compliance may still arise, risks of customs borders delays and backlogs still arise, and import VAT should still be considered.
- Therefore, apart from the application or otherwise of tariffs, there may be little difference between a deal and no deal outcome, and therefore if businesses have not already done so, they should start planning now, in relation to the non-tariff aspects.
2. What actions can be taken in the current uncertainty
As outlined above, in relation to goods, the main difference between a deal and no deal outcome to the current EU/UK negotiations, relates to the imposition or otherwise of tariffs. Issues such as customs borders, administration compliance, and import VAT must be considered irrespective of deal or no deal.
Therefore, at even at this stage where the outcome of the negotiations is still unknown, businesses should be considering the following issues which will be relevant irrespective of the outcome of the current negotiations:
- Understand your supply chain – Having this understanding is vital, to fully consider the possible impact of deal or no deal on import VAT, costs of administration, lead times and possible customs duties. Recent studies suggest that not all Irish businesses have a full understanding of their own supply chains.
- Ensure data systems are fit for purpose - For example, to capture country of origin etc.
- Government programmes – Businesses should participate in Irish government schemes such as “trusted trader” status, inward processing relief and customs warehousing, and avail of government supports and guidance where possible. These include:
- On 9 September the Irish Government published its Brexit Readiness Action Plan (“the Plan”) and a General Scheme of the 2020 Brexit Omnibus Bill. The Plan outlines a range of changes that are expected to occur with effect from 1 January 2021, irrespective of the outcome of the current negotiations. The Plan may be accessed here.
- Irish Revenue is intensifying its engagement with businesses and is currently contacting 90,000 businesses about their Brexit preparedness. It is providing businesses with a suggested checklist of critical preparation steps. These steps include customs registration by obtaining an Economic Operators Registration and Identification (“EORI”) number, and cashflow analysis for customs.
- In addition, other government departments are hosting Brexit preparation webinars October, registration for which can be made through Revenue’s website. This Revenue link is useful and contains a lot of valuable information.
- Review of current business contract provisions – These should be reviewed to see what changes (if any) might be required in the event of a deal or no deal.
- Communicate with key third party stakeholders – It is vital to maintain communication with all relevant parties to minimise disruption. These parties include suppliers, banks, key customers, regulators and joint venture partners.
- Agile corporate governance – It is vital that companies remain agile at executive and board level to react quickly to both foreseeable and unforeseeable events.
The outcome of the current EU/UK trade negotiations talks is of vital importance to Irish business. However, while the outcome of the talks currently remains uncertain, there are issues which Irish businesses should be considering at this stage, which will be relevant irrespective of the outcome of the negotiations. We and our Smith & Williamson UK tax colleagues would be pleased to discuss your particular issues from an Irish and UK tax perspective.
Note: Information is this article is sourced from The Brexit Readiness Action Plan, from Department of the Taoiseach, published at 9 September 2020
We have taken great care to ensure the accuracy of this publication. However, the publication is written in general terms and you are strongly recommended to seek specific advice before taking any action on the information it contains.
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Tax legislation is that prevailing at the time, is subject to change without notice and depends on individual circumstances. Clients should always seek appropriate tax advice before making decisions. HMRC Tax Year 2021/22.