By Nick Farmer, International Advisory Partner at Menzies LLP.
While it has never really been off the agenda, with less than six months to go until the end of the transition period, businesses have no time to waste in completing their preparations for Brexit. However, some businesses are still underprepared – so where should they start?
The lockdown restrictions introduced during the Covid-19 pandemic have forced many businesses to pause their everyday activities and react to the unfolding situation. During this time, a key deadline came and went at the end of June 2020, which means an extension to the Brexit transition period is no longer possible. With time rapidly running out for trade negotiators to reach an agreement, businesses are concerned that exiting the EU without a deal is becoming increasingly likely and many are now looking to fast-track their Brexit planning.
For businesses used to trading in Europe, a key risk is that Brexit could have a destabilising effect on their existing customer and/or supplier relationships. Depending on the scale of their trading activity in Europe, this uncertainty has led some businesses to make changes to their operational footprint, to allow these relationships to continue unaffected, with or without a trade agreement. Undertaking a critical path analysis can identify the pinch points for the existing business model and help focus the attention on what is going to be necessary to continue to trade as seamlessly as possible in 2021.
Given this impending deadline, it is important for businesses to actively decide on their own strategy for the change that is coming, whatever that may look like. Gone is the time for kicking the can down the road, businesses now need to make decisions on how best to approach international trade in 2021, even if that is based on imperfect information. Putting in place any plan, other than do nothing, which for many will not be a viable option, will take time, especially if a decision is made to set up in the EU. The rules of establishment and local regulations can vary considerably between member states, and deciding which jurisdiction is the best fit and implementing the most suitable structure requires considerable care, so businesses where this may be necessary should start now and seek support from advisers with international reach.
Businesses that are currently trading in Europe should also bear in mind that from the end of the year, the UK will no longer fall within the remit of EU tax directives. For example, the Parent-Subsidiary Directive currently allows money to flow from EU subsidiaries to a UK-based parent company, without incurring a withholding tax liability. However, from the start of next year, reliance on tax treaties may result in local withholding tax of between five and 10 percent. Similarly, the removal of the EU Interest and Royalties Directive will affect cross-border interest and royalty payments made into a UK-based corporate entity. To mitigate the impact of these changes, some businesses may wish to transfer cash and make cross-border payments before the end of the year.
Expected changes to the treatment of VAT and customs duties from 1 January 2021 should also be considered, particularly if businesses have an established supply base in mainland Europe and rely on a high volume of cross-border goods movements. Specifically, they should consider mapping their supply chains and pinpointing where tariffs, including import VAT and customs duties, could apply. Customer and supplier contracts should be reviewed carefully to determine which party is the importer of record and the relevant Economic Operator Registration and Identification (EORI) numbers should also be secured.
There is some good news for businesses importing goods to the UK from Europe in that a decision has been taken to defer customs declarations and VAT / customs duty payments by six months to the start of July 2021. Details of the border operating model to be introduced from the start of next year were published on 13 July 2020. Businesses should monitor guidance issued by the Border Delivery Group, HMRC and the Joint Customs Consultative Committee, and review their operational and cash management plans to take account of the incoming changes.
With the end of the transition period in sight, businesses can’t afford to delay their plans for Brexit. By assessing the impact of a no-deal scenario on their operating model and making the right adjustments, they can still be ready on time.