More than a million UK SMEs sell to customers in the EU, but with Brexit scheduled for 2021, these business-owners are plagued with questions. As their accountant, it’s time to arm yourself with the facts.
When will Brexit start to change things?
On 31 January 2020, the UK stopped being a member of the European Union, ushering in a transition (aka “implementation”) period that is scheduled to end on 31 December 2020.
The UK and EU have until 1 January 2021 to negotiate a new trade agreement. During the transition period, the UK will remain subject to EU rules and still be a member of the Single Market and Customs Union. Existing rules concerning the free movement of people and goods between EU countries and the UK will remain until 1 January 2021.
As a new agreement hasn’t yet been negotiated, we don’t know what will change, or to what extent, although the free movement of people and goods is likely to end on or before 31 December 2020.
How many UK SMEs will be affected?
According to government estimates, about 8% of UK SMEs export to the EU, which is roughly 530,000 businesses, out of a total SME population of 5.9m.
A further 15% (885,000) SMEs are in the supply chains of other businesses that export to the EU. So, about 1.4m UK SMEs could be affected by trade rule changes that result from Brexit.
We don’t yet know what will change or how, but let’s consider a few likely scenarios and their implications for your UK SME clients that sell to customers in EU countries.
Questions your clients might ask
Will my business have to pay new tariffs?
If UK and EU negotiators fail to reach a new trade agreement, the UK and EU will have to trade using basic WTO (World Trade Organization) rules. This scenario means tariffs would be applied to most goods which UK businesses sell to EU customers.
As explained on government website GOV.UK: “The tariffs on your exports will vary by country. Each country decides [its] own import tariffs. If you are exporting a product to a country that the UK has no trade agreement with after the transition period, the importer will pay the non-preferential tariff rate applied in that country to its imports.”
Tariffs would make UK goods more expensive for customers in the EU, and they may instead try to source cheaper alternatives, either from within the EU (where no tariffs are applied) or other countries (whose suppliers may be able to undercut UK SMEs).
Tariffs would also be applied to goods entering the UK from the EU, which would make imports more expensive.
What if I sell services to EU countries?
The UK will no longer operate under the European Economic Area (EEA) regulations for cross-border trade in services from 1 January 2021.
- Services provided by UK businesses will be regarded as originating from a “third country” (ie. non-EU Member State).
- According to GOV.UK: “You will need to follow the terms set out in the legislation of the host country. This includes commitments that the host country applies to all WTO members.”
- The government concedes that UK firms and service providers may face additional legal, regulatory and administrative barriers as a result.
- GOV.UK features detailed guidance to selling services to each EU country, Switzerland, Norway, Iceland and Liechtenstein post 31 January 2020.
How could new border checks affect my EU sales?
The UK government has confirmed its plans to introduce import controls on EU goods at the border, after the transition period ends on 31 December 2020. This is likely to be reciprocated by EU countries.
Because the UK will no longer be in the EU Customs Union, new compliance border checks for goods will be introduced, which could, to a greater or lesser extent, lead to delays (some have predicted bottlenecks at ports). This could have more serious implications for some UK sellers rather than others, for example, those who sell fresh produce or other perishable goods.
Your clients may also need to consider whether a customer could take legal action against their business for failure to supply to a deadline set out in their supply contract. Now might be the time to revisit the terms of such contracts.
What about currency fluctuations?
The pound to euro exchange rate has averaged about €1.33 over the past 20 years. At its highest, it was about €1.75 in May 2000 and at its lowest, in August 2019, £1 was worth just €1.09. It has since recovered somewhat, and in February 2020, £1 was worth about €1.20.
We don’t yet know whether the pound will strengthen or weaken against the euro after the end of the transition period. And, potentially, there are pros and cons to each. A weaker pound might make the things your clients sell more attractive to buyers in the EU, but their sales will be relatively less profitable.
Alternatively, were the pound to strengthen against the euro, their sales would be more profitable, but it could affect demand. Your clients may also have to take into account whether they purchase goods or services from the EU, of course.
What about customs declarations?
According to GOV.UK:
“From 1 January 2021 you will need to make customs declarations to move goods into and out of the EU. You should:
- get an EORI number if you do not already have one
- decide how you want to make customs declarations and whether you need to get someone to deal with customs for you.”
A freight forwarder, customs agent/brokers or fast parcel operator may be able to help your client get their goods through customs in EU countries. But it might be wise for your client and their staff to get additional training on customs and export rules post-transition.
What if I’m distance selling to the EU?
Distance selling means selling goods or services through digital TV, by mail order or by phone or text message.
In this instance, your client should register for VAT in the country to which they’re selling, if the total value of goods exceeds that country’s distance selling threshold (€35,000 for most countries) and they’re selling to consumers (not businesses).
What else should I do?
The Institute of Export recommends communicating “with your EU customers” to “reassure them of your commitment in the face of potential changes”.
It also advises UK businesses to “review sales to non-EU countries where the EU currently has Free Trade Agreements in place. Assess whether sales are dependent/influenced by duty preferences and may be at risk when the UK loses access to them”. The European Commission website lists these countries.
As regards technical barriers to trade, according to the government: “There should be provisions to address regulatory barriers to trade in goods, providing for cooperation on technical regulation, standards, conformity assessment procedures, and market surveillance, building on the WTO Technical Barriers to Trade Agreement.”
The government would like this to be part of a free trade agreement between the UK and EU. It might be worth seeking further advice on specific regulations and standards your client’s business uses, to find out about any post-transition changes.
Brexit will impact all of us, and people will turn to their accountant for advice on what to expect and how to deal with it. Start compiling a list of the basic need-to-knows for your clients now, and you’ll be ready when the questions come.
Stay tuned for more on the real-world effects we’ll start seeing from Brexit, and how you can best advise your clients on dealing with them.
Read more on Brexit and the finance landscape:
- 10 ways finance is changing
- Chancellor expected to reveal new MTD roadmap
- How accountants and businesses should prepare for Brexit
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