As the UK Government continues to push for an EU exit on 31 October 2019, a “no deal” Brexit remains a distinct possibility.

Where no withdrawal agreement is reached by the date the UK leaves the EU Customs Union and Single Market, trade between the EU and the UK will take place under World Trade Organisation (WTO) rules.[1]

We consider at a high level some of the issues facing traders in the food and beverage industry who are involved in the transport of goods between Ireland and the UK and what they may do in order to prepare for Brexit[2].

Food and beverage Industry

In the absence of any further agreements, customs controls will be operated on trade between the UK and the EU following the UK’s exit from the EU Customs Union. This means there could be customs declarations, border checks, tariffs, quotas and different VAT arrangements in operation after the exit date.

In this regard, the food and beverage industry in Ireland is especially susceptible to the impact of Brexit. For example, industry participants should prepare for:

• Supply chain delays driven by increased customs controls will have a significant impact on short shelf life products

• Customs and excise duty will further reduce margins for food businesses exporting into or from the UK

• Cash flow issues for SMEs, as there may be a delay on the repayment of VAT incurred on the import of goods into Ireland from the UK and vice versa

• Potentially increased costs and delay with using Great Britain as a land bridge for exports to the continent

EU Customs Union

The EU customs regime applies to trade with:

• Countries outside of the EU Customs Union, and

• Countries trading with the EU who are not in a customs union with the EU[3], or

• Countries that do not have a free trading agreement in place with the EU.

These countries are commonly referred to as third countries.

Being within the EU Customs Union, or being inside a customs union with the EU, means that customs duties no longer apply to trade within it. However, for trade with third countries, there is a uniform system of customs duties on imports, i.e. the EU common tariff.

Duty on goods from third countries is generally discharged when the goods first enter the EU. After that there is nothing more to pay and no further checks if goods move across the EU. Import charges can comprise Customs Duty (i.e. a Tariff), Excise Duty and Import VAT. Anti-Dumping Duty and Countervailing Duty[4] can also be imposed while goods specific licences (non-tax) may also be required.

Trading under an FTA – Hard Brexit

The objective of a free trade agreement (FTA) is to increase trade of goods and services with parties to that agreement[5]. FTAs can mean that customs duties on imports are either zero or minimal. However, free-trade areas always and necessarily involve border checks. Countries under a free trade agreement do need to operate customs controls at borders to some extent. This ensures that goods do indeed originate from the free trade agreement member country and are therefore entitled to customs free trade. Parties to a free trade agreement are also free to make their own trade deals with other countries. Each free trade agreement has its own Rules of Origin[6] that describe how exported goods shipped to a country qualify for reduced duties under the free trade agreement.

It was envisaged that, following the acceptance of Theresa May’s withdrawal deal, the UK and the EU would attempt to agree an FTA between the original exit date of 29 March 2019 and the end of the 21 month transition period[7].

Trading outside the Customs Union & Single Market – Hard Brexit

For countries trading outside of the EU Customs Union and Single Market, and where a free trade agreement is not in place, trade will operate under WTO rules. This means that tariffs could apply to some imported goods. The EU as a customs union has a common tariff which applies to all goods imported into the EU. It is important to note that while the rates of tariffs can vary significantly depending on the nature of the goods being imported, tariffs can be zero for some goods. In addition to tariffs, trade that operates under WTO rules could also result in increased customs administration and potential delays at ports.

Should the UK leave the EU without agreeing an FTA, it will need to impose WTO-approved tariffs on the imports of goods into the UK. It is anticipated that initially, the UK would just emulate the exiting EU common tariff and apply that to imports into the UK. This might at least give businesses transporting goods to the UK an idea of the customs duties that would apply to their products.

Customs Duty is normally calculated as a percentage of the value or per unit of quantity or weight of the goods being imported. The percentage varies depending on the type of goods and the country of origin. Unlike VAT, a trader will not have any potential to recover Customs Duty and will therefore be a real cost for businesses. Generally Customs Duties which apply to food products can be significant. For example, when imported into the EU, chocolate incurs a minimum duty of 8%, ice cream incurs a minimum duty of 17.8%, while meat can be subject to duties as high as 32%. Therefore, in the event of a no deal Brexit, where the UK mirrors the EU’s existing tariff schedule for WTO purposes, there are likely to be significant Customs Duty costs for Irish food exporters to the UK.

Customs Duty is charged on the price paid for the goods including local sales taxes (VAT equivalent) plus shipping, packaging and any insurance costs. Excise Duty is charged on alcohol, tobacco and oil products and is in addition to Customs Duty.

Goods transiting through the UK from Ireland – land bridge

A large proportion of Ireland’s road freight to the continent is transported through Great Britain[8]. Currently, goods originating from Ireland travel to Great Britain with few formal checks. If the UK leaves the EU Customs Union and the Single Market, all goods that transit to the continent via the UK will be subject to border control and customs checks. Depending on the agreement reached, Irish lorries may have to go through customs checks twice; once when entering the UK and a second time when entering the EU.

As part of the UK government’s preparations for Brexit, the UK has applied to re-join the Common Transit Convention (CTC) when it leaves the EU. The CTC facilitates cross border movements of goods between contracting parties to the Convention[9], by enabling any charges due on those goods to be paid only in their country of destination. Having the UK as a member of the CTC would be of significant benefit to Ireland. According to HMRC[10], the negotiations on the UK’s membership of the CTC are on-going.

Import VAT

Currently a common EU VAT system applies to both Ireland and the UK. Businesses that transport goods into the UK are required to account for VAT in their bi-monthly UK VAT return. This is either the supplier or customer depending on who holds title to the goods entering the UK. Most business will be entitled to recover that VAT in full through the same VAT return and, accordingly, the VAT accounting is neutral and essentially a form filling exercise.

Should the UK leave the EU Customs Union and Single Market, the EU’s VAT regime will no longer apply in the UK. As a result, goods moving between the UK and Ireland would then become subject to import VAT.

Under the current arrangements, import VAT would be payable upfront at the point of entry, in addition to any Customs Duty. Businesses which are entitled to recover this import VAT would need to wait until they file their bi-monthly VAT return to seek a reclaim. Reclaims may take a number of months to process and cause cash flow issues for businesses, particularly SMEs.

On a positive note, HMRC has published guidance recently where it states that it plans to operate the delayed system of accounting for VAT which currently applies to acquisitions from the EU in the event that the UK falls outside the EU VAT regime. In Ireland, the Brexit Act[11] provides for the introduction of a system of postponed accounting for import VAT following the UK’s exit from the EU. These are certainly welcome developments.

While the measures contained in the Brexit Act will apply to all traders initially, the Brexit Act incorporates provisions to make its application conditional on the satisfaction of certain criteria. Where a business does not satisfy the criteria, Revenue may issue a notice of exclusion stating that the business is excluded from operating the postpone accounting.

It is important to note that the postpone accounting would apply to the importation of goods from all countries outside the EU and not just those from the UK.

VAT is charged at the point of importation at the same rate that applies to similar goods sold in the importing country. The standard rate of VAT in Ireland, which applies to most goods, is 23%. The standard rate in the UK is 20%. Should the UK fall outside the EU VAT regime, most goods imported into Ireland from the UK should be subject to Import VAT at 20%, while goods imported into Ireland from the UK should be subject to import VAT at 23%.

However, as most food products are subject to the zero rate of VAT, many products emanating from the food and beverage industry should therefore be subject to a zero rate of Import VAT. Nonetheless, many food products will be subject to the standard rate of Import VAT. For example, the VAT rate applicable to tea, bread, fruit and vegetables sold in the UK is zero, while the sale of alcoholic drinks, confectionery, crisps and savoury snacks, hot food, sports drinks, hot takeaways, ice cream, soft drinks and mineral water are all subject to the standard rate 20% rate in the UK.

The value of the goods for the purpose of calculating the amount of VAT payable at import is their value for customs purposes, increased by the amount of any duty or other tax (but not including VAT).

Authorised Economic Operator

Authorised Economic Operator (AEO) status is a certified authorisation issued by customs authorities in the EU for traders involved in customs declarations. It is an internationally recognised quality mark that allows a trader to be recognised worldwide as a safe, secure and compliant trader in international trade. Having AEO status allows businesses to avail of certain customs simplifications and/or security simplifications. However, it should be noted that the benefits of AEO status do not entirely eliminate obligations regarding customs applications, customs controls or customs formalities.

When the UK leaves the EU, UK traders may lose their EU AEO status unless mutual recognition of a UK AEO scheme is agreed with the EU. The EU has mutual recognition of AEO schemes with Norway, Switzerland, Japan, Andorra, the US and China. The UK government has indicated that it would look to negotiate mutual recognition of Authorised Economic Operators. Many commentators see AEO as a means to mitigate against some of the customs delays and formalities following Brexit, should such mutual recognition be achieved.

Irish Government Brexit proofing

In his 2019 budget speech, the Irish Minister for Finance, Paschal O’ Donoghue, announced a number of further initiatives to mitigate against the impact of Brexit. In the context of the food and beverage sector, a Future Growth Loan Scheme for SMEs and the agriculture and food sector is due to come into operation early next year. This scheme will provide long term loans to businesses at competitive rates. It is understood that 40% of the funding available will be earmarked for agri-food businesses.

The Future Growth Loan Scheme is in addition to the Brexit loan scheme launched in March 2018. This short term loan scheme is particularly aimed at Irish SME’s importing goods from the UK or exporting goods to the UK. The scheme provides for loan amounts of between €25,000 to €1.5m per eligible enterprise with a maximum interest rate of 4%. Loan terms range from 1 year to 3 years. Unsecured loans of up to €500,000 may also be available. The scheme also provides for optional interest-only repayments at the start of the loans.

These measures should assist participating food and beverage businesses to meet future working capital requirements and help fund the innovation and adaptation of the business required to alleviate the effects of Brexit.

Preparation time

Assessment

While there are many unknowns as to what the final Brexit deal, if any, will look like, we would encourage all businesses in the food and beverage industry with customers or suppliers in the UK to:

• Assess readiness for the Customs Duty and Import VAT implications of the UK leaving the EU Customs Union and Single Market

• Consider what arrangements may be required in the UK to facilitate the payment (or suspension) of Customs Duty and Import VAT

• Consider whether any customs reliefs can be introduced e.g. warehousing, suspension arrangements, inward processing, onward processing etc.[12]

• Consider AEO and deferred payment account scheme[13]

• Consider whether a binding tariff information (BTI) ruling should be sought in respect of a particular product[14]

• Consider whether your customs agents and tax compliance agents are equipped to deal with the additional numbers of customs declarations to be submitted on your behalf & have you assessed costs of same

• Determine whether additional costs will be passed on to consumers

• Carry out a feasibility study - profitability vs. increased supply chain costs

Contracts

We would also advise businesses affected by Brexit to review existing contracts and those who are entering into new Brexit relevant contracts to determine:

• Who is the Importer / Exporter

• Who is responsible for customs clearance

• Who is responsible for payment of Import VAT and Customs Duty

• Who is responsible for obtaining any import/export licences

• Who is the responsible party for payment of freight/invoice

For more information on the likely impact of a no-deal Brexit on your business, contact a member of our Tax or Food, Beverage & Agriculture teams.

The content of this article is provided for information purposes only and does not constitute legal or other advice.