Brexit and indirect taxes at the end of 2022

Robert Marchant, Partner, VAT and Customs Duty Services

Businesses have been operating in a post-Brexit world for several years now. Those trading in goods internationally had to adapt to new import and export processes, handling customs duty obligations, the loss of EU VAT simplifications and new requirements to move goods between Great Britain and Northern Ireland.

While many of these initial teething challenges have been resolved, there remain a number of areas where uncertainty and unexpected costs continue to occur.

Indirect tax changes

The immediate indirect tax changes resulting from Brexit created ‘business critical’ risks for organisations to deal with, both in terms of minimising the impact on their margins as well as ensuring the ability to continue to trade with their customers and suppliers.

Last year those organisations largely reacted to the new Brexit rules; both from a technical perspective but also from a practical one. There were a number of ‘myths’ about the UK/EU trade deal which resulted in considerable friction.

There was the requirement for businesses to submit import and export declarations when goods cross the UK/EU border which was a new procedure for many.
Despite political suggestions to the contrary, the UK/EU trade deal was not completely tariff free. Zero tariffs only apply to goods which originate in the UK or EU. Goods which originate from another country may not fall within the parameters of the UK/EU trade deal, meaning they are potentially subject to positive rate duty when imported.
A significant change for UK businesses selling goods to customers in the EU and vice versa, is the potential to have to maintain overseas VAT registrations in the destination country or countries, particularly in situations where the supplier acts as ‘importer of record’ into the destination country. Maintaining overseas VAT registrations is not always straightforward even when the preparation of VAT returns is outsourced.
The Northern Ireland protocol introduced new administrative processes in order for goods to move between Great Britain and Northern Ireland and many organisations reported difficulties in understanding the new requirements.

Administrative issues in 2022

Import VAT

An area where businesses have reported difficulties is with import VAT; some of the challenges have been administrative but this can easily lead to unexpected costs if the import VAT cannot be reclaimed because of a break down in that administrative process.

HMRC introduced Postponed Import VAT Accounting (PIVA) from 1 January 2021 which allows importers to postpone the payment of import VAT to their VAT return so that they pay and often reclaim the import VAT at the same time, eliminating the cash flow disadvantage of paying import VAT at the frontier. Where PIVA is used, organisations will need to ensure that the GB VAT number and GB Economic Operators Registration and Identification number (EORI) are linked. When this is not the case, VAT becomes payable before the goods are released, which can lead to delays.

While using PIVA has a positive impact on cash flow, a decision has to be made for each import as to whether it will be used. This is resulting in importers having a mix of imports where PIVA is applied and others where the ‘old’ system of paying the import VAT at the time of entry and then subsequently recovering it via a VAT return when a C79 certificate is issued by HMRC.

This dual system causes confusion for businesses. As has the need to have an account separate from the HMRC Gateway to access the online PIVA statements. It is also not uncommon for businesses to have imported goods and to have ‘missing’ import VAT, either because they deferred the declaration, they did not use PIVA (and so should receive a C79) or the transaction is missing from the PIVA statement for another reason.

Another common area of difficulty is with businesses wanting to import into the UK for the time but who are not yet UK VAT registered. It can take several months for a UK VAT registration to be set-up and many businesses do not want to delay the importation of their goods for this long. It is possible to obtain a temporary EORI number to allow the importation to take place, but import VAT and Duty (where applicable) will need to be paid at the time of entry (PIVA is not available) and additional actions will need to be taken to enable the import VAT to be reclaimed once the UK VAT registration is set-up.

CDS

An important administrative development is HMRC’s migration away from the ‘old’ Customs Handling Import and Export Freight (CHIEF) system to the Customs Declaration Service (CDS). With some limited exceptions, from 1 October 2022 CDS became the UK’s sole customs imports declaration platform. From 30 March 2023, CDS will also take over from CHIEF for export declarations.

The migration to CDS requires businesses to take administrative action. In order to register for CDS, a business must first have a Government Gateway account and a GB EORI number. Registering for CDS also allows businesses to download statements for Postponed Import VAT, select how they will pay for duty, set up a new direct debit instruction for their Duty Deferment Account, and authorise customs agents to act on their behalf.

Future developments in 2023

Northern Ireland

The most likely high-profile area of change in the future could be in relation to the Northern Ireland Protocol. The UK Government’s attempts to renegotiate the terms of the arrangement have been widely reported and there remains the possibility, albeit that this has receded recently given other politically and economic urgencies, that the UK may trigger article 16 of the Northern Ireland Protocol, which allows either party to suspend part or all of the protocol if they conclude that its operation leads to serious “economic, societal or environmental difficulties” that are liable to persist.

The potential implications of triggering article 16 could extend well beyond the limited impact of the article itself. Along with additional actions the UK Government may take with it, this could lead to a snowball effect and a rapid further deterioration in UK-EU relations, with the EU possibly taking reactive measures including suspending or Terminating the EU-UK Trade and Cooperation Agreement, applying tariffs or require additional checks or licences on imports from the UK or cease cooperation in other areas such as on data adequacy, aviation and research programmes. Given businesses desire stability to plan and meet their compliance obligations, such uncertainty makes doing so all the more difficult.

Freeports and Investment Zones

Freeports are part of the Government’s Levelling-Up strategy and in 2021 the introduction of Freeports in eight areas was announced, the areas being: East Midlands Airport, Felixstowe and Harwich, Humber, Liverpool, Plymouth, Solent, Thames and Teesside. It is intended that a further four areas will be identified in England, as well as in Scotland, Wales and Northern Ireland.

A lot of work has been taking place behind the scenes to create the legal and operational framework for the freeports to open. There will be tax incentives for businesses to relocate to the freeports and they are expected to support UK manufacturers who import materials to create finished goods which are exported around the world.

It should be noted though that many of the likely customs related benefits of a Freeport area are already available elsewhere, through existing duty suspension (customs warehousing) or relief approvals. A Freeport area may offer some simplifications not available under conventional customs warehousing or inward processing, but these have not yet been defined. So, setting-up in a Freeport may not necessarily be the most appropriate action for businesses to take given the likely large capital costs of relocating/ opening new premises

During 2022, the government also announced the possible creation of 38 Investment Zones across Great Britain. Businesses located within these areas would benefit from tax incentives and planning liberalisation. In principle, these will benefit businesses within these Investment Zones but it seems that little has been done for businesses located outside these proposed low tax areas. It should be noted that it is possible that some of the existing or proposed Freeports will also become Investment Zone sites so that the two programmes complement each other. As more details are released, businesses will need to assess whether the benefits are compelling enough for them to make a move.

In summary

It is hoped that 2023, will be a year with more stability when compared to recent years. However, there are several areas where further changes can be expected, including trade with Northern Ireland and the emergence of Freeports in the UK. Organisations will need to consider any impact on their operations.

Some organisations have already been strategically assessing whether their post Brexit supply chains are optimised which may lead to further changes for some, particularly as organisations also reflect on whether any particular changes are needed to their arrangements as a result of wider supply chain considerations.

The initial impact of Brexit was also cushioned to a certain extent by a set of easements which prioritised the flow of goods above collection of revenue. For many UK businesses which may have considered the impact to be minimal, 2023 may challenge the strength of their preparedness, as the UK’s priorities migrate back towards revenue collection and customs compliance.