Nick Farmer – International Tax Partner
DD: +44 (0)1784 497153
With less than six months to go until the end of the transition period, and even though it has never been completely off the agenda, businesses have no time to waste in completing their Brexit preparations. Whilst this may not be easy given the uncertainty that exists, it remains vitally important for all businesses to be as well prepared as possible for the new landscape that will arrive at the start of 2021.
International trade in 2020
The UK left the EU on 31 January 2020 and during a transition period has remained in the EU single market and customs union so that cross-border trade has continued unaffected. To date the main impact for business in 2020 has come from the significant changes that have had to be made to their activities as a response to the Covid-19 Pandemic. However, during this unprecedented situation, a key deadline came and went at the end of June 2020, meaning an extension to the transition period is no longer possible. This means that new trading arrangements will be in place, come what may, on 1 January 2021, and with time rapidly running out for trade negotiators to reach an agreement, many businesses are concerned that exiting the EU without a deal is becoming increasingly likely.
2021 International Strategy
Given the impending deadline, it is important for businesses to actively decide on their own strategy for the coming changes. Gone is the time for kicking the can down the road, businesses now need to make decisions on how best to approach EU trade in 2021, even if that is based on imperfect information. To help you through this decision-making process, we have previously provided a Brexit Risk Barometer which highlighted ten common Brexit-related risks, and these core areas remain relevant in putting a plan in place.
Completing a critical path analysis of this nature will enable you to stress test 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. For instance, one of the key risks is that Brexit could have a destabilising effect on existing customer and/or supplier relationships. Depending on the scale of their trading activity in Europe, this has led some businesses to make changes to their operational footprint, to allow these relationships to continue unaffected, with or without a trade agreement.
Some businesses may also wish to incorporate the forthcoming changes into a more comprehensive 2021 international strategy. This would seem worthwhile, as with a variety of trade deals currently being negotiated, such as with the US, Australia and Japan, this could identify other global opportunities for the business. Local advice will often be required if new markets are identified, and where this is the case we can provide comprehensive global reach through our membership of HLB to help guide you through the decision-making process.
Withholding taxes
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 the 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.
Changes to VAT & Customs Duties
Expected changes to the treatment of VAT and customs duties from 1 January 2021 should also be considered, particularly if you have an established supply base in mainland Europe and rely on a high volume of cross-border goods movements. Specifically, this would involve mapping the 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, the key message here is that businesses can’t afford to delay finalising their international trade plans. The discipline of ensuring that you have actively assessed your international operating model and made the necessary adjustments could make all the difference come 1 January 2021.
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