What does January 1st and the trade agreement really mean to businesses?

What does January 1st and the trade agreement really mean to businesses?

For those that didn’t head off on Christmas Eve to seek a copy of the new trade agreement that the UK and EU have negotiated for bedtime reading, here are some of the key points.

I am also motivated to write this from a little dissatisfaction with media reporting. To be fair to the mainstream media, they have a very tough job to do. They need to take pages and pages of legal text and make it meaningful for the average man (and woman) in the street. That is a tall order when most are not business owners and don’t normally encounter the practicalities of importing and exporting.

This article is therefore an opportunity to cut through the media summaries we saw at the start of the year and put some important information about the trade agreement into some practical contexts.

International Trade Specialist, Frances Fawcett explores the impact of December’s trade agreement on customs declarations, tariffs, VAT, Country of Origin and more…

Customs Declarations – this is not news!

This is getting a lot of media attention because there will, indeed, be increased procedures for importing and exporting goods between the UK and the EU. For any business trading with countries outside of the EU, you are doing these already. If you are a small or medium-sized business, the chances are that your transportation partner is organising this for you. When you book your transport, whether it is through a broker site or direct with a courier or freight forwarder, they are asking you the right questions and taking care of the customs declarations.

They are charging you for the service, but it is probably lost on your invoice and merely considered an administration charge. Goods worth over £300bn are exported from the UK to the EU and a little more than that are imported – this is a dramatic increase in the volume of customs declarations that will need to be done so expect some teething problems. Very few IT systems could cope with such a huge increase overnight. But we have all known about this for months and grant programmes have been in place to help everyone prepare. And, good news, for most imported goods, you can choose to delay declarations by 6 months. Customs declarations are, therefore, not news!

International Trade Matters delivers a programme of online courses that provide comprehensive training in customs declarations and import/export documentation alongside many other global trade topics.

Tariffs – this is the good news!

What is news – and very welcome news – is that there will be no trade tariffs or quotas between the UK and the EU. Tariffs are taxes and quotas are limits. No tariffs mean, for some, very considerable cost savings, and no quotas means no limits on the amount of trade. I have worked with businesses in recent weeks who were facing anything from a potential 6% tariff to as much as 30%. What that meant to them is that if they sold goods to the value of, say, £1,000 to customers in the EU, the customer would have to pay an additional amount from £60 to £300 on top of the price of the goods. Businesses were having to consider whether they could absorb the additional cost to remain competitive or pass them on to their customers. And the same was true for goods they were importing – leading to potentially significant cost increases. Happily, all that uncertainty is gone. Goods can be bought and sold between the EU and the UK completely free of trade tariffs (taxes). This is, indeed, very good news.

VAT – mixed news!

This might be the time to consider VAT registration…

Local sales tax – VAT in the UK and for members of the EU – will become payable on goods that attract VAT when they are imported or exported. Again, this the same as the local sales tax that goods attract when they are sold to other countries, it is just referred to by other names in some other places in the world. But it is payable. If you are a VAT registered business, you can claim the VAT back. More good news – the UK government announced postponed VAT accounting from 1st January so that businesses can declare their import VAT at the same time as they recover the VAT. Interestingly this applies to goods imported from any country, not just EU countries. This is therefore a benefit to cashflow for all your imports. Definitely good news!

The challenge with VAT is for small businesses who are not registered for VAT, and – whatever their size – for those businesses selling to consumers. You can only claim back VAT if you are VAT registered. If you are a small business below the threshold for VAT registration, you will still have to pay, but be unable to claim it back. This might be the time to consider VAT registration even if you are below the current threshold of £85,000 turnover per year.

But here’s the rub – if you’re VAT registered you will have to charge VAT. That’s fine if your customers are businesses – they will, in turn, just claim it back. But if your customers are consumers, that’s a portion of your income that now becomes a tax that has to go to the government. Or a price rise. Neither are good outcomes! And if you have consumer customers in the EU, they are now facing sales tax (VAT) on the goods they are importing from you. There are some lower limits and, of course, there are goods that don’t attract VAT. So, each business will need to analyse this for themselves. As I say, mixed news.

Showing Country Of Origin – this is the REAL news!

Just because your supplier is in the UK does not mean their supplier is in the UK

Hidden in amongst the detail of the trade agreement and missed by most of the mainstream reporting that I’ve seen, is the critical issue of Country of Origin. This is both completely logical and frequently not managed well enough in many businesses. This ensures that the goods subject to the highly advantageous trading position of no tariffs are definately from the UK. Completely reasonable – no one ever intended that the UK became a back door to allow entry of goods from other countries that do attract tariffs. Therefore, to benefit from tariff free trade, you must declare that your goods are of UK origin. And, most importantly, if ever challenged or scrutinised, prove that to be legitimate.

This will mean that you need to know where all the components that you use in your products originate. That’s not where you bought them from – it’s their Country Of Origin. Just because your supplier is in the UK does not mean their supplier is in the UK. Your purchasing folk will need to obtain written confirmation from each of your suppliers declaring the origin of each of the products you buy. When you know the origin, you can build a costed bill of materials for the products you sell to determine their origin. Only then can you safely declare Country Of Origin on your sales paperwork and benefit from tariff free trade.

I am often asked by businesses if it’s OK to confirm that their goods are of UK origin simply because they manufacture them here in the UK. The answer is no! Proving origin with a costed bill of materials, and certainty about the origin of components, is the only way to confirm origin. It is not adequate to assume that because you manufactured the finished article here, you have definitely produced an item of UK origin.

It is completely to be expected that the trade agreement applies to goods originating in the UK. But putting the processes in place to demonstrate this, and declare origin with certainty, is a piece of work than many businesses will now be undertaking. This is news!

And there’s more…

…now the work starts to truly see its impact on our businesses

The trade agreement is over 1,000 pages long for a very good reason. It covers numerous aspects of trade and activities between the EU and the UK. I haven’t touched on road freight, services, digital, or the many aspects that your HR teams will be looking at, affecting employees from the EU. I haven’t covered all the aspects of international trade that are included – I have only drawn out the key issues for most of the businesses I’ve worked with. We can all agree that a trade agreement is a good thing – but must also agree that now the work starts to truly see its impact on our businesses.

The small print – and how we can help

For each of the schemes that I’ve mentioned above, there are exceptions. There are thresholds, some goods are outside of the scheme that allows you to delay your import declarations, and so on. Therefore, it is vital that you analyse the impact of our departure from the EU and the new trade agreement for your specific business circumstances.

Please get in touch – we’d like to help you with that and it’s what we do every day with a very wide array of different types of business.

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