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14 February 2020 - Anja Markmann

United Kingdom's EU exit and the impact on customs issues


The implications of Brexit for importers and exporters: customs duties, taxes, costs

+++ Jan 4: This articles contains outdated information and will be updated soon +++

Brexit and customs - what will the effects be? Brexit finally happened on 31 January 2020 and the United Kingdom is no longer a member of the European Union. But for companies that import and export to and from the UK, the uncertainty continues as they attempt  to grapple with questions relating to customs tariffs, taxes and new procedures. Will tariffs be introduced for future trade between Germany and the UK? How high will they be? What measures will the UK put in place to deal with customs procedures?

The brexite has been completed - but what happens with taxes and customs duties is still uncertain
The brexite has been completed - but what happens with taxes and customs duties is still uncertain © WFB/Pusch

There is no definitive answer to any of these questions yet because the UK is currently in a transition phase that lasts until 31 December 2020. During this time, trade will continue as if the UK were still a member of the EU. In other words, ‘business as usual’.

The UK and EU wish to use this transition period to negotiate a free trade agreement that will regulate the future trade in goods. Many experts are sceptical as to whether it will be possible to conclude this agreement within such a short space of time and whether the political forces in the UK are even interested in maintaining a close relationship with the EU.

Tariffs and taxes: the implications of a hard Brexit

If the two sides are unable to reach an agreement (‘hard Brexit’), there is a risk of serious disruption to trade between Europe and the United Kingdom. Guest contributor Anja Markmann, who is responsible for customs and international trade law at Bremen Chamber of Commerce explains what this might look like:

“If there is no free trade agreement by 31 December 2020, or no draft version by July 2020, there is a risk of a hard Brexit. This would mean third-country customs tariffs being imposed on imports and exports, and goods having to undergo customs formalities. It would mean that British products will cost more in Bremen and Germany and all goods exported to the United Kingdom would be more expensive. There would also be the problem of long processing times at the customs border between the EU and UK – a particular concern for perishable goods.”

The British have already solved the problem of having an external EU border across the middle of Ireland by means of a newly negotiated compromise solution. There will be no customs border on the island of Ireland – in other words no controls between Northern Ireland and the Republic of Ireland, which remains in the EU. The checks will instead take place at the Irish Sea ports. All goods whose ultimate destination is the Republic of Ireland – i.e. the EU – will be checked to ensure that EU customs rules have been enforced. What is different about this arrangement is that the checks required by EU rules will be carried out by British customs officers, not EU officers.

Will there be customs controls or will a free trade agreement prevent a disruption of exports to Britain?
Will there be customs controls or will a free trade agreement prevent a disruption of exports to Britain?

Tariffs and taxes for trade with the United Kingdom – an example

The following example explains how customs procedures currently work and how they would work in future in the event of a hard Brexit. In the example, we will send a consignment of Bremen coffee to the UK and import a jar of Marmite from the UK to Germany.

This is how the customs procedures between Germany and the United Kingdom currently work:

Export of Bremen coffee to the UK (currently)

At the moment, things are still simple: A Bremen coffee manufacturer receives an order for a delivery to London. The export to the UK does not require any export declaration, although the product must comply with the British labelling regulations for this foodstuff. The manufacturer in Bremen issues a commercial invoice without including VAT at the rate applicable in the country of sale, i.e. the UK. This is permitted as long as both businesses possess a valid VAT registration number. The benefit is that the business in Bremen does not have to collect or pay over any VAT in the UK (no double taxation). The coffee arrives in London without any border checks or hold-ups. The British business issues a confirmation of receipt.

Marmite shipped to Bremen from London

It is currently a similar story if goods are sent from the UK to Germany. A company in Bremen orders Marmite, a popular vegetarian yeast-based spread, from the sales office in London. The British sales office issues a commercial invoice with zero VAT, quoting its own VAT registration number and that of the recipient in Bremen. The jars of Marmite are despatched to Bremen using a freight forwarder. The labelling on the jars must comply with the German regulations for this foodstuff. The consignment is transported without any delays at the border. The German customer confirms that the goods have actually been received in Germany. The Marmite consignment is paid for by means of a SEPA transfer in euros, which is free of charge, or a foreign transfer in pounds sterling, for which a charge is payable.

We export exemplary coffee to England to explain customs procedures before and after the brexite
We export exemplary coffee to England to explain customs procedures before and after the brexite © WFB/Pusch

Impact of Brexit from 1 January 2021 – will it all be different?

A free trade agreement has to be negotiated between the EU and the UK by January 2021 in order for trade to continue smoothly. If no agreement can be reached, there will be a hard Brexit. The United Kingdom will then be treated by the EU as a third country and this will change the way in which goods pass through customs.

Using our example of a consignment of Bremen coffee and one of British yeast spread, we will now show what this would mean in practical terms. Our example assumes that there is no agreement at all on customs tariffs. See how customs rules change in a scenario where the United Kingdom becomes a third country:

’UK as third country’ export scenario

This would mean that the coffee from Bremen destined for London would be despatched to a ‘third country’.

1. The coffee company would have to submit an electronic declaration to customs in Bremen via the internet, stating that the consignment of goods was being exported to the UK, and then await an electronic approval from the customs authorities. To this end, the company concerned would have to apply to the customs authorities for an EORI number (economic operator registration and identification number). The export notice (Ausgangsvermerk), which is issued electronically, would serve as proof that the consignment had been exported.

2. The coffee company in Bremen would issue a commercial invoice stating that the goods were exported from the EU and therefore exempt from VAT. The commercial invoice would have to include the following details: brand, identification numbers, quantity and type of packages, exact description of goods, weight and content of each package, and the country of origin. The information would also have to include the FOB costs (to port of shipment) and, if used, the CIF costs (cost, insurance and freight to port of destination).

3. Documentary proof of the origin of the goods, i.e. a certificate of origin issued by a chamber of industry and commerce, could also be required.

4. The goods, together with all accompanying documentation, would be transported by a freight forwarder using the TIR carnet system. This system facilitates customs declarations by the contracting parties and allows the goods to be transported through transit countries without these countries levying import taxes or duties. However, a security needs to be lodged with an association that provides the necessary guarantee.

5. In the UK, the coffee would be declared to customs for import purposes and checked at the border. When the goods cross the border, the relevant import VAT in the UK would be become due for payment. The goods would then be subject to customs duty at the third-country rate – expected to be 5 to 6 per cent (the average EU rate of duty for goods is 4 per cent). However, within the World Trade Organization (WTO), rates of duty can be up to 40 per cent.

6. At the border, the labelling of the goods would be checked to ensure compliance with UK law –  when imported for the first time, the goods would be inspected by the British authorities to make sure they complied with all requirements, such as hygiene and consumer protection regulations.

7. The goods would be paid for by international transfer, for which charges would apply.

This would all amount to additional time and organisational effort for our coffee roaster in Bremen.

As the exchange rate would no longer be fixed within the European Monetary Union, this could give rise to uncertainty in relation to the price of the goods. If the pound sterling were to fall in value, goods from Germany would become more expensive for British customers, as a consequence of which German products could lose some of their appeal. The new customs duties payable on the goods would also make the coffee more expensive in the UK.

Can't miss English breakfast: The Marmite spread that takes some getting used to
Can't miss English breakfast: The Marmite spread that takes some getting used to

UK goods shipped to the EU in a hard Brexit scenario

In this scenario, Marmite would enter Bremen as a third-country product.

1. Before the product arrived in Bremen for the first time, the authorities in Bremen would check that it was safe for human consumption. The labelling would have to meet German regulations.

2. The goods would be imported using a system again involving an export declaration in the UK and an import declaration in Germany.

3. The documentation for the goods would have to accompany the consignment for importation purposes: the commercial invoice with details of brand, identification numbers, quantity and type of packages; exact description of goods; quantity or volume of goods; terms of delivery and payment; price of the goods (including details of costs based on FOB and CIF terms) and details of the buyer/seller.

4. The goods would be transported by a freight forwarder using the TIR carnet system and would be checked at the EU’s external border.

5. German import VAT of 19 per cent would become due for payment, together with any rate of duty applicable to third-country products. In the case of a yeast-based spread, the duty would probably be 6 per cent, but up to 35 per cent is possible within the WTO.

6. The goods would be paid for by international transfer, for which charges would apply.
Because of the free-floating exchange rates, Marmite could become less expensive if pound sterling were to depreciate. There is no certainty however.

Summary: tariffs and taxes in the event of a hard Brexit

Brexit will not prevent trade between the UK and the EU, but shipments will require considerable extra time, effort and expense. Furthermore, the follow-on costs arising from customs clearance and tariffs, potential exchange rate fluctuations, payment transfer fees and/or other export formalities could rise. On top of the increased cost of goods, companies will also have to budget for higher staff costs as more time will have to be spent dealing with customs formalities.

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