There are less than six months to go until the UK leaves the EU single market and customs union on 31 December. Having already left the European Union in January (which effectively sealed Brexit), the country has been in a transition period ever since, with the UK continuing tariff-free trade with its continental neighbours.
However, that’s all set to change on 1 January. From that day onwards, the UK will no longer follow EU rules. The UK and EU are currently negotiating a deal. Depending on the outcome of these talks, the UK could be facing two different pathways.
The two scenarios – and their implications
Should the government secure a free-trade agreement (FTA), the UK and the EU’s relationship will be based upon tariff-free trade.
But, if the UK and EU fail to reach an agreement (there are many sticking points such as data sharing, security, aviation standards and access to fishing waters), then the UK will leave without a deal, otherwise known as ‘no-deal’. This would see the country assume ‘third country’ status and begin trading with the bloc under World Trade Organisation (WTO) terms, with all British exports subject to EU tariffs and border checks.
Whichever path the UK takes, be very clear. Changes are real and inevitable.
It’s something that many economists and business organisations claim could irrevocably harm British businesses – causing endless paperwork, traffic ‘bottlenecks’ at ports and inflated prices on goods.
The Covid-19 pandemic has also diverted attention away from Brexit. In November, spending watchdog the National Audit Office said, “It is very unlikely that all traders, industry and third parties will be ready for the end of the transition period.”
Clarity (or lack of it) is another challenge. “We still haven’t got the clarity from the Government as to what it is we’re all dealing with and what exactly the processes will be,” says Mark Farrar, chief executive of the AAT. “I have every sympathy with the people impacted; this is going to be challenging.”
In the weeks ahead, accountants and finance professionals will play an integral role, dispensing guidance and advice to their clients about how they can best navigate any post-Brexit hurdles. They’ll be inordinately busy too – according to HMRC, up to 250,000 SMEs will be making customs declarations for the first time if there’s no deal.
Will businesses still be able to hire EU nationals in the future? How will Brexit affect GDPR? And what should accountants be doing to make the processes for their clients easier? The answers to these questions and many more below…
Any business that imports or exports goods in and out of the European Economic Area (EEA) – which comprises the 27 EU nations plus Norway, Iceland and Liechtenstein – will need to make customs declarations from 1 January 2021. Here’s what they need to be aware of:
Making a customs declaration
- Businesses will need to submit a full declaration whenever the goods enter the UK or EU (unless they are putting them into temporary storage).
- Making a customs declaration is complicated. Accountants might want to suggest that their client uses an intermediary (such as customs agents, freight forwarders or fast parcel operators) to help them.
- If a business wants to make customs declarations themselves without an agent, they can do so online via the Customs Handling of Import and Export Freight (CHIEF) system.
- A duty deferment account enables businesses to defer customs duties, excise duties and import VAT. Instead of paying these taxes and duties on individual consignments, they can be paid once a month through direct debit.
- If your business/client is registered for VAT, it can also account for import VAT on its VAT return from 1 January 2021.
- After 31 December 2020, an UK EORI number (Economic Operator Registration and Identification) will be needed for any business that moves goods between the UK and the EU. The number should be prefixed with ‘GB’.
- Businesses that don’t have an EORI number can expect increased costs and delays. For example, if HMRC can’t clear a company’s goods at the border, the business may need to pay storage fees.
- An EORI number won’t be needed if the business provides services only.
- HMRC has already auto-enrolled many VAT-registered companies that have traded with Europe before. However, firms that are below the VAT threshold and/or don’t have a ‘GB’ EORI number will need to apply here.
- The process of applying for an EORI number should take 10 minutes or less, and it will take up to a week to arrive.
- If you move goods to and from Northern Ireland (or to make a declaration in the country), you’ll need an EORI number that starts with XI. However, you can’t apply for this without having a GB EORI number first.
- If a business makes customs declarations in the EU, it will need an EU EORI number. This is also needed for any EU company that wishes to receive goods from a UK supplier.
The 2021 three-stage imports process
Full border controls on goods entering the UK won’t apply until 1 July 2021, meaning businesses can defer payments for six months. The border checks have been split into three phases:
From January 2021:
- Customs declarations will need to be submitted for controlled goods (those goods that need to a license to be imported such as alcohol and tobacco).
- Traders importing all other goods can delay payments and submitting declarations payments for up to six months.
From April 2021:
- Any products of animal origin (including meat, pet food, honey, milk or egg products) and regulated plant products will need pre-notification and relevant health documentation.
From July 2021:
- Customs declarations will be needed at the point of importation for all goods traded between the UK and EU. Tariffs will also need to be paid on these goods too.
- A global tariff will be introduced on 1 January 2021, aimed at cutting costs for UK businesses and consumers.
- The tariffs on more than 6,000 products will be simplified and streamlined.
- Goods that will have zero tariffs include dishwashers, freezers, tampons, bay leaves, cocoa powder and Christmas trees.
The customs grant scheme
- Grant funding is available to help companies that do their own customs declarations.
- This is aimed mainly at Customs intermediary companies, who are likely to be busy once the transition ends, due to extra demand from the traders they work with. It would also be available to any traders or business that intend to do their own customs declarations.
- The grant will support recruitment, training/upskilling and IT (updating customs software etc). The allowance can also cover salary costs for new/redeployed staff up to a limit of £12,000 per person and £3,000 for recruitment costs of new employees.
- However, grants will be issued on a first-come, first-served basis. Applications will close on 30 June 2021 or earlier if all the £50m funding has been allocated.
- For more information and to make an application, check here.
VAT and tax
VAT-registered traders can include import VAT on their VAT returns by using postponed VAT accounting from 1 January 2021. However, non-VAT-registered traders will still need to report and pay import VAT through customs. Remember that postponing payments and declaration payments may result in increased paperwork later on.
Claims for refunds on EU VAT need to be submitted via the EU VAT refunds system before 31 March 2021.
- An EORI number won’t be needed for businesses moving goods between Northern Ireland and Ireland.
- The Government’s three-stage approach for border controls won’t apply for Ireland either.
- The Northern Ireland Command Protocol will cover continued access for Northern Irish businesses to the UK market.
- If you haven’t already, look over the supply chains of your client/business. How are these supply chains going to change once the transition period finishes? What customs declarations will they need to submit? Do they need to be registered for VAT in another country? What additional costs could they incur? Are there any savings or efficiencies that can be made?
- Brief your clients on any potential disruption to their businesses. You can download/access an AAT checklist on Knowledge Hub.
- Has your business/client appointed an agent yet? Do they want to use an intermediary or would they prefer to go down the more burdensome task of submitting declarations themselves?
- Ensure your client has an EORI number.
- Make your clients aware of the duty deferment account and how UK border controls will change in 2021.
- Are there any reliefs your client/business could be utilising, such as customs warehousing and inward-processing relief?
- Direct your client’s attention to the commodity codes they use to declare your goods. They could be overpaying import duties without realising.
- Suggest that your client/business spends some time revising contracts, terms and conditions, and their website.
- Transition to life outside the EU could trigger upheavals, such as currency fluctuations and delays. Factor this into any cash flow forecasts for your clients.
- A no-deal Brexit could result in the company paying increased import/export duties. Is it possible for them to renegotiate prices with suppliers? Or is the business able to transfer these costs onto their customers by raising prices? If this is the case, suggest that your client/business reevaluates its pricing models.
- Keep up to date with the latest Brexit news and advice from AAT and the Government.
From 1 January 2021, British businesses will need to apply VAT when trading with EU countries in the same way that they currently do when trading with non-EU countries. The major changes include:
- On 1 January 2021 the UK will introduce postponed accounting (also known as deferred import VAT). This means that businesses won’t need to pay import VAT when their goods arrive at the British port or airport. Instead, they’ll need to account for it on their VAT return. This will apply both to imports from the EU and non-EU countries.
- This could be advantageous for some firms (especially those with cashflow issues) but could cause extra paperwork six months down the line for others.
- Distance selling means selling goods/services through digital TV, mail order or by phone or text message.
- From 1 January 2020 UK businesses will be able to ‘zero-rate’ any sales of goods to EU consumers/businesses. However, these goods will be subject to VAT and customs duties in individual member states.
- If a business ‘distance sells’ to the EU, they should register for VAT in the country that they are selling to. This is even more important if the total value of goods exceeds the distance selling threshold for that country (€35,000 for most EU countries).
VAT on digital services
- British companies that sell digital services to EU consumers will no longer be able to use the UK’s VAT Mini One Stop Shop (VAT MOSS) to declare sales and pay VAT due in EU member states. All final returns for MOSS should be submitted by 20 January 2021.
- Businesses can still use MOSS after 1 January 2021, but will need to register in an EU member state. More information available on the European Commission website.
- Alternatively, businesses can opt to pay VAT in each member state where they sell digital services to consumers. Again, see the European Commission website for details on how to register.
- For e-commerce services, VAT collection will shift from the border to the vendor’s website. Sellers will charge and collect output VAT from the UK website, usually at the online checkout. These e-commerce firms will also need to declare this VAT.
- The Low Value Consignment Relief (LCVR) – the VAT waiver that relieves import VAT on commercial imports of goods valued at £15 or less – will be scrapped.
- You can continue to claim VAT refunds from EU member states until 31 March 2021. This can be done via the EU VAT refund system, but your business/client will only be able to claim refunds incurred in an EU member state before 1 January 2021.
Ireland and VAT
- For goods imported into Great Britain (England, Scotland and Wales) from Northern Ireland: UK import VAT will need to be paid.
- For goods imported into Northern Ireland from Great Britain: EU VAT will need to be paid (however, this can be deferred via postponed accounting).
- No VAT will be due on exports from Northern Ireland to Great Britain, or from exports from Great Britain into Northern Ireland.
- Exports from the European Union to Northern Ireland will follow current EU procedures.
- Businesses in Northern Ireland will need to enter a dual-VAT regime that will see them collecting sales tax on behalf of both the UK Treasury and EU tax authorities.
- Those businesses transferring goods between three parties in the EU will no longer be able to take advantage of the triangulation process. Instead, they’ll need to register in any countries that they engage with.
- Some sectors may be exempt from paying VAT, such as tour operators or fintech firms. For the latest advice, check gov.uk .
- Discuss with your client whether postponed accounting will be beneficial for them.
- Do they need to register to pay VAT in any individual EU member states?
- If they need to make a claim for EU VAT refund, encourage them to do so before UK companies lose access to the EU VAT refunds system.
- Suggest that your clients review their contracts, websites and/or terms and conditions to allow for any changes triggered by the transition period. For example, there could be delays in delivering goods which could be problematic if your client has promised customers that the goods will arrive on their doorsteps within 48 hours.
- If your client is an e-commerce website, do they need to tweak their IT systems to accommodate the new changes to VAT payments?
Earlier this year, the government and the UK’s Financial Reporting Council (FRC) announced that there would be no major changes to accounting and corporate reporting during the transition period.
However, there will be some changes after the transition period ends. This will have repercussions for a small number of businesses (see below).
- For financial years beginning after 31 December 2020, UK incorporated and UK-listed companies and groups that currently use EU-adopted International Accounting Standards (IAS) will be required to prepare accounts using UK-adopted IAS. There won’t be any changes for UK incorporated companies currently using UK GAAP to prepare their accounts.
- For financial years beginning during the transition period, British companies with a UK listing can continue to use EU-adopted IAS.
- UK incorporated groups that issue debt from a subsidiary incorporated in the EU will need to both comply with the rules of the country where the subsidiary is based and produce accounts that comply with the UK Companies Act 2006.
- EU/EEA organisations with a presence in the UK will need to file individual annual accounts with Companies House for accounting periods from January 2021.
- British companies operating in the EEA will need to meet the national auditing regulations of the countries that they operate in.
- If a British audit firm currently audits EEA companies, they may not be able to sign an audit report for this company from 1 January 2021.
- The British government has also warned that UK audit qualifications may no longer continue to be recognised in EEA countries.
People and travel
- Any business that is reliant upon EU nationals should encourage these staff to apply for the EU Settlement Scheme so they can continue to live and work in the UK. They must apply before 30 June 2021.
- British businesses will still be able to hire staff from EEA countries after the transition period ends. However, the UK government will introduce a controversial new points-based immigration system from 2021. People who want to live and work in the UK after 1 January 2021 will need to gain 70 points to be eligible to apply for a visa. The first 50 points will be awarded for meeting requirements such as: an ability to speak English to an acceptable level; having a job offer from an approved employer; the role being at an A-level equivalent skill level (minimum salary of £20,480). Applicants can earn the remaining 20 points by: earning more than a “general salary threshold” of £25,600; having a job offer in a “shortage occupation”; being a ‘new entrant’ to the labour market; holding a relevant PhD.
- Health-workers can apply for a fast-track visa, while the system also encourages scientists and engineers.
- International students will be able to stay in the UK for at least two years after graduating.
- From 1 January 2021, British passports must have at least six months left in order to be valid for travel to EU countries.
- Tourists won’t need a visa for stays of less than 90 days to EU/EEA countries. However, they may need a visa or permit if they wish to stay longer, work or study, or for business travel. For more information, consult the travel advice for each individual country.
- The European Health Insurance Card (EHIC) will only be valid until 31 December 2020. Access to state health care may not be possible from January onwards, so visitors with a pre-existing medical condition are advised to get comprehensive travel insurance.
- From 1 January 2021, there’s no guarantee that free mobile phone roaming will continue in the EEA. Check with mobile phone operators for more information.
- People travelling to the EU in their own vehicle might need a ‘green card’ or valid proof of insurance, plus a GB sticker.
- Travel to Ireland will not change from 1 January 2021. British citizens will also be able to work in Ireland in the same way as before.
- Encourage your client that they might want to inform their EU/EEA employees about the importance of applying for the EU Settlement Scheme.
- Talk to your client about setting up ‘right to work’ processes if they wish to employ staff from the EU in the future.
- Do your clients’ employees regularly travel to the EU? Factor in any costs that visas and extra insurance might entail.
- During the transition period, personal data (data that can identify a living person, including names, addresses, IP accounts and payroll details) will still be able to flow between the EU/EEA and the UK without any restrictions.
- The EU is currently undertaking an ‘adequacy assessment’ of the UK to establish whether the country has a sufficient level of data protection. If the UK is found to be ‘adequate’, then personal data should flow as freely as it did before.
- If the EU hasn’t made an adequacy decision before the end of the transition period, EU laws could apply. Check out the Information Commissioner’s Office (ICO) for more information.
- Much of this is dependent on current negotiations between the UK and EU; keep up to date with any developments in the news.
- Government Brexit checker tool.
- Informi – How should my small business prepare for Brexit?
- Federation of Small Business Brexit hub.
- Deloitte Brexit briefing
- Baldwins – Brexit advice
- Kreston Reeves- Brexit advice.
Guidance on new UK immigration system for employers
The Government is encouraging employers to prepare for the UK’s new immigration system. It has published resources for employers on the possible immigration routes under the new points based system for which it provided basic information in July.
The aim of the new system is to facilitate the immigration of people who can contribute to the UK’s economy so there is a route for skilled workers who have a job offer from an approved employer sponsor, but there is no general route for employers to recruit at or near the minimum wage. People earning less than less than £20,480 may still be able to apply by “trading” points on specific characteristics against their salary, for example, if they have a job offer in a shortage occupation or have a PhD relevant to the job.
AAT Comment offers news and opinion on the world of business and finance from the Association of Accounting Technicians.