Brexit, How will your shipments be affected?
The most-frequently asked question from Publiship clients at present is ‘How will Brexit affect our shipping arrangements’? The UK government position on post-Brexit trade arrangements is stated as follows:
Negotiating new comprehensive UK trade agreements is a priority for the Government as we leave the EU. We want to have a new, mutually beneficial customs agreement with the EU that supports these objectives, but we have an open mind about the form of that agreement
In this paper, we look at the background, current situation, and, absent of any firm indications, try to assess what may happen in the event of various Brexit scenarios.
Firstly, some background:
The Customs Union – A trading area with common external tariffs and customs barriers which negotiates trade deals as one. As a member of the Customs Union, the UK is not allowed to negotiate trade deals on its own.
The Single Market – Encapsulates the four freedoms of the EU – the free movement of People, Goods, Capital and Services as well as removing tariffs, quotas or taxes on trade within the EU. Further, the Single Market removes so-called “non-tariff barriers” – the same rules and regulations on safety and standards apply across the EU.
Post-Brexit, speed of access at the UK/EU border will depend on the UK complying with both the Customs Union and Single Market, to ensure that goods only enter the area of the EU free of border controls as they do now, so long as goods have been subject to EU duty and conform to EU standards.
Ideally, the UK Government would like to continue to trade as we do now with the EU and also have the ability to negotiate bilateral agreements with third countries. The stumbling block is the control of goods arriving in the UK from these other countries, which may then be re-delivered to EU member states. What if they do not conform to EU standards? How will EU duty be accounted for on such shipments? These are the challenges the negotiators face.
The UK Government has stated that there should be no physical border controls on the island of Ireland and has agreed in principle with the EU that, should there be no conclusive agreement with the EU, goods crossing the Irish land boundary will be subject to rules and regulations which follow the principles of the Customs Union and the Single Market.
The Challenges for Importers:
If the final Brexit agreement results in the need for customs declarations, what are the main issues when importing from the EU?
1. VAT – The UK Government has recently announced that it would introduce postponed accounting for VAT for imports from both the EU and third countries in the event the UK leaves the EU without an agreement. This will still require the collection of duty at the frontier for goods where duty is payable. There is, however, some doubt as to whether this could be implemented in time, in the event of a hard Brexit. If not, VAT on EU imports would be payable on import, as opposed to the current method of accounting for VAT on a periodic return. Goods belonging to traders without deferment facilities, or sufficient credit arrangements with customs brokers, may have their delivery delayed while payment arrangements are made. Traders with deferment accounts and credit facilities could potentially have their goods held up as a result if their goods are less than a full truck and loaded with other cargo. Imports from outside the EU would continue as normal until the postponed accounting system was established.
2. Border controls – Any additional controls will cause significant delays to all traders. The southern short-sea ports have made it known that they cannot manage any additional delays to vehicles moving through the Kent ports and the Channel Tunnel and although traders would look to use other UK ports to by-pass the Channel ports, there is currently insufficient capacity to handle a reasonable percentage of the 4.2 million vehicles which pass through Dover and the Channel Tunnel each year. A trailer requiring customs clearance currently takes about one hour to complete formalities. A more automated arrangement could reduce this time for hauliers but this will not be in force before March 2019.
3. Potential additional duty costs – In the event of no deal, these would become a reality for product purchased from EU member states, however, most observers believe that any deal would include a free trade agreement with the EU. Although many goods are not subject to duty, various food items are subject to significant duty rates, and this would be politically difficult to deal with. Incidentally, post Brexit, this duty revenue will go to the UK Government.
For goods arriving from countries where the EU has either a preference, or free trade agreement, it is likely that the UK will want to agree to similar, if not identical terms as those already agreed with the EU and it would be difficult to justify introducing Customs duty on goods from these countries. A no deal scenario would require duty to be collected after 29 March for goods being imported from those countries where the UK has a free trade agreement negotiated by the EU until new arrangements can be agreed. The UK Government has stated that it will unilaterally agree to uphold the General System of Preferences (GSP) arrangement which allows preferential duty rates for imports from those countries who are part of the GSP system once the UK leaves the EU.
4. Implications for EU re-deliveries – At this stage, with the final deal unknown, Traders must consider if they should establish EU entities/warehouses and ship directly to the EU to avoid UK Customs duty. In the event of a hard Brexit without a free trade deal, traders may wish to consider Customs-bonded warehousing to avoid payment of UK Duties for cargo to be re-exported to the EU.
5. Customs Brokerage Capacity – International Road hauliers are generally not familiar with customs controls, so again, some education will be required with some companies considering establishing inland customs depots to enable the processing of customs declarations outside the port areas. The brokerage industry will need to significantly expand overnight as it is estimated that the number of declaration will increase from 50M to an estimated 255M per annum. The freight forwarding industry has identified that there is no possibility of recruiting and training the large number of staff needed to undertake the extra volume of work, should there be a hard Brexit with no trade deal on March 29th 2019. The National Audit Office has identified 11 of 12 critical IT systems in use at the border as being at risk of not delivering on time, or to acceptable quality. Other factors to consider:
- There is a new Customs computer system being rolled out in December this year, and re-training of staff is taking place throughout the freight forwarding industry. However, as with the introduction of any new system, potential for problems exists.
- There will also be a large increase in Traders new to the Customs clearance process. Many will have been importing from the EU without the need for clearance, and if the UK is not involved in a Customs Union, there will be a steep learning curve for those Traders.
6. Immigration – the UK Government may protect certain skilled sectors, which may include HGV drivers, but will be less likely to issue work permits for low-skilled people working in the warehouse sector. The Government has recently announced that its immigration policy post Brexit would treat EU citizens in the same way as those from outside the EU.
7. Driver Availability – The logistics sector is dependent on drivers from Eastern Europe. 57% of all intra EU loads are driven by Eastern European nationals. There is already a shortage of HGV drivers in the UK, and without occupational protection, the situation is bound to worsen.
8. Road Permits – An agreement will be required to allow hauliers to move goods to and from the EU, but it is assumed this will be agreed without difficulty
When, and what can we expect?
In theory 23.00hrs, Friday 29 March 2019 but few are likely to be ready for a hard Brexit. If the UK and the EU agree a settlement plan, there will be an implementation period of twenty-one months to 31st December 2020, which may be further extended for perhaps a year to allow for change and further negotiations. During this period, it likely to be business as normal, but the UK will be technically outside the EU.
If no settlement plan is agreed before March 29th there will be a ‘hard’ Brexit which will result in:
- World Trade Organisation (WTO) rules for imports which will require duty to be paid on goods where the UK importers currently enjoy EU negotiated free trade agreements
- Duty will be payable on imports from the EU member states
- VAT will be due on imported goods from the EU until the Government is able to introduce postponed accounting
- Border controls and associated traffic queues
- UK origin goods included in EU manufactured goods may not be deemed as meeting the EU origin criteria for goods exported outside the EU, which could discourage orders placed with UK businesses
- No transition period
In whichever situation the UK leaves the EU there will be implications for how the UK border is managed. The UK’s management of the border is currently heavily influenced by its membership of the EU, which allows free movement of goods, services, capital and people across member states. The ongoing negotiations on the UK’s future relationship with the EU will determine how the border operates when the UK leaves the EU. If the UK leaves the EU with no ‘deal’ in place on 29 March 2019 (‘day one of no deal’), or at any stage thereafter, then trade between the UK and the EU would be governed by World Trade Organisation (WTO) rules including the principle of ‘most favoured nation’. This principle requires non-discrimination between trading partners and the consistent application of customs checks, tariffs and non-tariff barriers to trade. This means that new customs controls, tariffs and non-tariff barriers might apply to around £423 billion of trade at the UK border, and could require government to put in place new systems, upgrade existing systems and make extensive other changes.
Planning for border operations in the event of a ‘deal’ is less developed than that for ‘no deal’ because of the ongoing uncertainty regarding the nature of the future relationship between the UK and the EU. The exact nature of a ‘deal’ between the UK and the EU is still to be determined but, if a ‘deal’ is reached, government departments expect there to be little immediate change at the border. They consider that, overall, the scale of the challenge to implement a ‘deal’ would be much less significant than the work required to be ready for a ‘no deal’. This is because departments consider that many of the ‘no deal’ projects and programmes would no longer be necessary and there would be more time to implement those that are still required. However, introducing new border arrangements as part of a ‘deal’ could still involve a large amount of work leading up to and beyond the end of the implementation period in December 2020. For example, HMRC is currently designing how it could implement an interim capability to allow a Facilitated Customs Arrangement to operate from the end of the implementation period but expects that implementing the full system would take longer
In July 2018, HMRC stated that it would cost ports a considerable amount of money and time to make the necessary changes, and that the point had already passed where these changes could be put in place by March 2019. The National Audit Office confirmed that key ports and suppliers need reasonable certainty before making significant investments in infrastructure, people, systems or processes. Although the government started publishing technical notices to help businesses and the public prepare for ‘no deal’ in August 2018, these may not contain sufficient detail to enable businesses to justify investment decisions.
How should you prepare?
1. Increase lead times: Begin planning now for delays at the border. Build a contingency into lead times, and ensure sufficient time between arrival at the port and delivery of cargo for book launches and publication dates. The normally quiet post-Chinese New Year period to the end of March is likely to be extremely busy, as Traders seek to have goods into the UK prior to March 29th, particularly if a hard Brexit is in prospect.
2. Consider any changes you may need to make if you have to follow the same or similar processes to trade with the EU as you do with the rest of the world.
3. Take account of the volume of your trade with the EU and any potential supply chain impacts.
4. Consider whether you could use customs procedures to delay or relieve the payment of customs duty until your goods are ready to be released into free circulation. We can advise in the event of a ‘no deal’ scenario whether one of these procedures would be suitable for your business.
5. UK customs procedures for rest of the world trade will not be affected. However, as a business trading with the rest of the world, you will lose facilitations accessed through the UK’s membership of the EU and may find trade between the rest of the world and the EU more difficult, or that EU-based customs intermediaries are less able to support you. Make an assessment of your business with the EU and prepare accordingly.
6. If the UK leaves the EU without an agreement, the government will introduce postponed accounting for import VAT on goods brought into the UK from the EU. This means that UK VAT registered businesses importing goods to the UK will be able to account for import VAT on their VAT return, rather than paying import VAT when the goods arrive at the UK border. This will apply to imports from the EU and non-EU countries. If you currently pay VAT on importation for any of your products, ensure your accounting departments are aware of the changes.
7. Register for HMRC’s EU Exit update service on GOV.UK. Search for ‘HMRC videos, webinars and email alerts’, click to register to get business help and education emails, enter your email and select ‘EU Exit’.
Please note: All information contained here is expressed in good faith, for guidance and reference purposes only and should not be considered authoritative. Brexit negotiations are on-going, and the information above could be superseded at any time.