The practical impact of the UK’s departure from the EU on VAT and customs duty will take effect at the end of the Brexit transition period, which is currently scheduled for 31 December 2020. Businesses which trade goods with the EU will need to adopt import and export procedures post-Brexit, so understanding the ‘Incoterms’ agreed with customers and suppliers in the supply chain is crucial.
Incoterms are used to determine which party (supplier or customer) is responsible for the risk in the goods and the costs of transport, including freight costs, insurance, duties and import VAT for cross border transactions. Once Brexit takes effect, the chosen Incoterm will determine who is liable to clear customs in the country of destination and make the customs declaration (and thus pay the duties and import VAT) on goods moving in either direction between the UK and EU.
If not carefully considered, this may have adverse consequences; from 1 January 2021, EU customers are unlikely to accept the burden of customs charges in the country of destination. As a result, UK suppliers may need to consider accepting the responsibility of overseas duty and import VAT by agreeing the ‘delivered duty paid’ (DDP) Incoterm with customers. This may result in overseas VAT registrations and potential cash flow issues.
For UK suppliers the objective will generally be to take on as little risk as possible. Agreeing ‘ex-works’ (EXW) Incoterms with customers may seem beneficial for suppliers. Strictly, EXW puts no responsibility on the seller for the transport and export of the goods from the UK and places responsibility for customs clearance and payment of duties and import VAT on the buyer in the country of destination. However, this also leaves the seller with little control of the export of the goods from the UK and there could be difficulty in proving that the goods actually left the UK – an important factor in securing zero-rating for VAT.
UK customers currently acquiring goods from the EU will have to treat these as ‘imports’ after the Brexit transition period, which will bring additional administrative burdens, costs and customs charges. Thankfully, there are a number of ways to mitigate the impact of these costs such as using a duty deferment account, which allows the payment of duties and import VAT to be made monthly.
Coronavirus has only exacerbated the exposure to VAT and customs duty risks, as it has forced many businesses to adopt entirely new supply chains, for example switching production lines to manufacture supplies and equipment used to fight the pandemic. Contractual agreements entered into now with overseas customers and suppliers will determine not only the current responsibilities for moving goods to and from the UK but could also affect the position once the Brexit transition period ends. Without adequate planning, cross border traders may face unexpected costs such as overseas import VAT and customs duties.
The Incoterms agreed with customers and suppliers on new and existing supply chains should be reviewed now in order to prepare for Brexit and mitigate any additional costs. Those adopting new supply chains under coronavirus should also take care and consider the potential impact of Brexit when entering into new contractual agreements.