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Tax tips can keep companies a step ahead of Brexit

Businesses trading cross-border between the United Kingdom and the European Union can prepare now for disruption stemming from Brexit.

By Marc Bunch, EY UK Global Trade Leader, and Mats Persson, Head of EY Global Trade for Advisory UK & Ireland

Businesses are in full preparation mode as the UK prepares to leave the European Union in 2019. We’ve compiled a list of the top tax initiatives to help companies get ready.

Unchartered territory

The United Kingdom is set to become the first country to leave the European Union, in March 2019. Since joining the original European Economic Community in 1973, the UK has been part of a single, “frictionless” market. That means zero-tariff access on exports to other EU nations (and vice versa) and no pesky forms to fill out at ports or land borders.

Barring a mutually beneficial free-trade deal, it is becoming increasingly likely that a “hard” physical border will be reinstated between the two jurisdictions. This could complicate taxes and tariffs, the movement of goods and require additional documentation. To preempt any of these threats, preparation is vital for organizations of all sizes, from micro enterprises to multinationals with complex supply chains in both the UK and EU.

Prepare for an evolving corporate tax regime

For many companies, the post-Brexit world means wrestling with changes to the UK’s tax ecosystem. It is important to look at the entire tax picture.

While Prime Minister Theresa May has said the UK will keep cutting its corporate tax rate to attract businesses, firms must consider other Brexit-related tax changes that could affect their organization. These include changes to investment incentives, the taxation of European nationals working in the UK and vice versa, and the tax implications stemming from a relocation or changes to business models.

Prepare for changes to indirect tax

One major challenge is simply preparing to be ready on time for any change as the Brexit deadline looms. In March 2018, the UK and EU announced a provisional agreement for a transitional period from March 29, 2019 to December 31, 2020 during which the UK would keep the benefits of the single market and customs union, according to a report from The Guardian [1].

Businesses are already scrambling to get HS customs classifications and other master data in place, implement systems changes and adjust other processes so they can operate without disruption.

Businesses should also study longer-term implications, including reviewing how changes to trade, duties and value-added tax (VAT), including VAT refunds, will affect their supply chain and cash flow. In a paper released in August, Future customs arrangements: a future partnership paper, the UK said if there are no agreements in place when the country leaves the EU, it would treat trade with the EU the same as non-EU countries, meaning that customs duties and import VAT would apply. Even if businesses are eligible for VAT refunds, the process would take time and affect cash flow.

Prepare for border friction

Two-way EU-UK trade was worth £553 billion ($732 billion) in 2016, with more than 200,000 UK businesses trading with the EU, according to the UK government. Brexit is destined to radically alter how the two sides trade with each other, and every business – big or small – should hope for the best and prepare for the worst.

Will goods still move smoothly between the UK and EU, or will there be a slowdown? There is a fear of the latter scenario. The Dutch customs authorities, for example, have predicted a 140% increase in customs formalities as a result of Brexit.

In order to address the expanding administrative burden, firms could consider adding more workers specialized in customs and creating simplified customs procedures to make sure any trip to the border is a smooth one. Further out, technology could help reduce border friction.

Prepare for new partners

Businesses that have not had a direct relationship with EU customs authorities will want to start building one sooner rather than later in order to keep their goods moving across borders and avoid higher costs or additional duties or tariffs. Beyond the customs authorities themselves, more than a dozen agencies regulate the trade that flows into the EU, and between Member States, from the European Food Safety Authority to the European Chemicals Agency.

After Brexit is complete, the UK will have its own mirror agencies regulating all goods that enter and exit the country. It will be important for businesses to get to know who those agencies are and how they affect their organization.

Prepare for greater scrutiny

The issue of “origin” will prove to be a vital issue for businesses moving goods across the EU-UK border in the future. Currently “rules of origin” do not apply for goods shipped from the UK to the EU. This will change post-Brexit, and “rules of origin” will be applicable to the UK if it has a free-trade agreement with the EU or trades according to World Trade Organization rules, according the UK Parliament. UK businesses selling food, cars or clothing in the EU should know which share of each product was made in the UK.

Businesses have warned that the introduction of “rules of origin” between the UK and EU will lead to greater paperwork, technical barriers and costs. For example, higher tariffs could be imposed on a leather jacket sold by a UK retailer in France that was mostly made in China.

Prepare for uncertainty in Ireland

There is no current border between Northern Ireland and the Republic of Ireland (ROI), but what will happen with Brexit? Moving goods between the two jurisdictions could soon become more challenging and businesses will need to review their supply chains.

For example, how will changes to the border affect German automakers, which ship parts to Dublin that are transported to Northern Ireland to be turned into finished cars and then sold back into Ireland? A likely outcome might be more fully local supply chains, with completed goods produced and consumed entirely on one side of the border.

Conclusion

Businesses trading cross-border between the UK and EU can expect change and disruption stemming from Brexit. While the future trade relationship between the two jurisdictions remains unclear, firms can take action today

By closely monitoring developments, evaluating potential areas of risk, assessing the affected functions and developing a plan of action, businesses can make sure they are ready for a new UK-EU trade regime that could have tax implications across the organization. Those businesses that prepare early and thoroughly will be better equipped to deal with ongoing uncertainty in the years to come.

EY Brexit webcast:  A fork in the road for readiness plans

How we can help: Brexit tax landscape

Endnotes

[1] https://www.theguardian.com/politics/2018/mar/19/uk-and-eu-agree-terms-for-brexit-transition-deal

LEARN MORE

EY’s Connected Tax spotlights the rise of the tax function as a strategic boardroom partner. We help you link the broader organization and its stakeholders, tax authorities, and the data and information that are transforming business models. Learn more at www.ey.com/connectedtax.

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