For smaller UK businesses exporting to the EU, the new Brexit rules have so far been problematic for many and unworkable for some. One of the unexpected issues that has emerged is highlighted below.
Rule of origin confusion
Since the 1 January, many UK businesses have since discovered that they now face significant additional costs and must handle more responsibilities on their exports bound for the EU.
While businesses continue to comprehend the complexities of the agreement, one such difficulty which has become immediately apparent is the “Rule of Origin”. The rule specifies that any goods arriving to the UK from outside the EU, which are then exported from the UK into the EU, will be subject to customs duties. This has come as a surprise to many firms – particularly for those businesses which continue to source their products from outside the UK or the EU and now leaves many UK businesses with a serious competitive disadvantage going forward with a number of unattractive choices to consider.
The first option is to absorb the additional costs and responsibilities, but this option will increase the costs and therefore impact on the related profit margin arising from EU exports.
Secondly, UK businesses could cease trading with EU customers which will have the effect of reducing the business activities of the company equal to the revenue foregone by ceasing to trade in this market.
Thirdly, UK business could incorporate a company in a country which continues to be a member state of the EU. This will eliminate the many difficulties arising as a result of the recent Trade and Cooperation Agreement and should have little or no overall effect on the level of turnover undertaken by the business going forward. Taking such a step could result in increased level of business within the EU over time.
If you are considering your options, please talk to us as we have contacts in the EU who are currently engaged in providing advice to UK companies wishing to explore the option of establishing an EU subsidiary for a UK holding company. If structured correctly, the EU entity can be used as a trading vehicle to import products from outside the EU and distribute them to customers.
New VAT rules applying to B2C trades in the European Union
As of 1 July 2021, new European VAT rules for business to consumer (B2C) transactions will apply, where professional, technical and intangible services (such as accountancy, legal, professional, consultancy, licensing) will be taxable where the consumer resides and subject to the supplier charging and accounting for the relevant Member State’s VAT rate. This can be done through a mini Import One Stop Shop registration to cover all 27 Member States of the EU, thereby making the reporting obligations a little lighter.
Why the new rules? This is an attempt by the EU to set a level playing field for the supplies B2C of these services and is expected to generate a further €7 billion in VAT for the EU per annum.
Currently, and up to 1 July 2021, a non-EU provider does not charge or account for VAT when supplied to an EU B2C recipient of professional, intangible services; but there will be a charge with effect from 1 July 2021. Where a supplier makes supplies of these to multiple EU consumers with different EU VAT rates, pricing, terms and conditions etc. will need to be considered.
It is considered that this will not apply to those financial services UK B2C to the EU that do not attract VAT in the EU, but it is possible there could be some changes here when the EU and the UK start negotiations on the financial services between the two sides.
The new rules will take some time to “bed in” and we will keep you updated on practical actions to take and as new rules or agreements are made between the UK and the EU. In the meantime, if you require any assistance relating to Brexit and your personal or business circumstances, please email info@beavismorgan.com or contact your usual Beavis Morgan client partner.