Introduction

The United Kingdom left the European Union on 1 February 2020. Under the Withdrawal Agreement which governs its departure, the existing trade rules will continue to apply until the end of the transitional period ie 31 December 2020. However, from 1 January 2021 the UK will be outside the EU’s Single Market and Customs Union and this will bring about significant changes to trade between the EU/ Ireland and the UK.

The negotiations on the future trading arrangements have not progressed well, and the Irish Government is advising businesses to prepare for two scenarios: (i) a limited Free Trade Agreement, or, (ii) a hard Brexit with the EU and UK trading on World Trade Organisation (WTO) terms.

Either scenario will be highly disruptive, with profound political, economic and legal implications, for the UK, for Ireland and the rest of the EU. A hard Brexit with WTO terms will include the introduction of tariffs and quotas on trade both in and out of the UK, with significant impacts on the Irish agri-food sector.

Even if a comprehensive free trade area is established with between the EU and the UK, providing for zero tariffs and zero quotas on goods, and with customs and regulatory cooperation, all products traded between the EU and the United Kingdom will be subject to regulatory compliance checks and controls on imports for safety, health and other public policy purposes.

Ireland’s food and beverage industry is left particularly vulnerable due to Brexit as 38% of the agri-food industry’s exports in 2019 went to the UK. This is compared to other EU countries who export less than 10% of their produce to the UK. We will now consider at a high level some of the issues facing traders in the food and beverage industry who are involved in the supply of goods between Ireland and the UK and what they may do in order to prepare for Brexit.

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 would be customs declarations, border checks, tariffs, quotas and different VAT arrangements in operation from 1 January 2021.

In this regard, the food and beverage industry in Ireland is especially susceptible to the impact of Brexit and accordingly Industry participants have been preparing to deal with the following issues:

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

• Customs and excise duty which 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

• Countries trading with the EU who are not in a customs union with the EU

• Countries that do not have a free trading agreement in place with the EU, i.e. third countries

Being within the EU Customs Union or being inside a customs union with the EU means that customs duties do not 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 Customs Tariff.

Duty on goods from third countries is generally discharged when the goods first enter the EU and 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 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. 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 that describe how exported goods shipped to a country qualify for reduced duties under the free trade agreement.

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 World Trade Organisation (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.

The UK have announced their new system of tariffs, the UK Global Tariffs system (“UKGT”) which will apply to most imports into the UK from 1 January 2021, in the absence of any preferential trade agreement with the EU. While many tariffs provided in the UKGT are at more favourable rates than existing EU tariffs, this change will have a significant impact on the price of products imported from the EU, which previously were subject to no tariffs.

However, the UKGT will not apply to imports into Northern Ireland from the EU (including Ireland). As per the Withdrawal Agreement, Northern Ireland will essentially remain within the EU Single Market after the Transitional Period expires on 31 December 2020. Goods traded between Northern Ireland and EU member states should therefore remain subject to no import tariffs and duties.

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.

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. 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, 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, the negotiations on the UK’s membership of the CTC are on-going.

Import VAT System

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.

As it stands, the UK is due to leave the EU’s VAT regime on 31 December 2020. In the absence of an agreement to the contrary, goods moving between the UK and Ireland will then become subject to import VAT. The value of the tax charged will depend on the country into which the goods are supplied. Unlike the current arrangement, import VAT will be payable upfront at the point of entry, in addition to any Customs Duty. So currently, businesses will need to wait until they file their next bi-monthly VAT return to claim a credit for this import VAT. This could take up to ten weeks to recover and therefore could cause cash flow issues for businesses which do not have a deferred payment authorisation and therefore is expected to potentially have a real impact on SMEs.

On a positive note for importers into the UK, the UK have provided for postponed VAT accounting to avoid this problem , where VAT may be accounted for (and simultaneously reclaimed if applicable) in the importer’s bi-monthly UK VAT return in certain circumstances. This is certainly welcome news for importers into the UK.

In September 2020 the Irish Government published the 2020 Brexit Omnibus Bill to address a range of issues that arise at the end of the transition period. The Bill includes proposals that cover the introduction of postponed accounting for VAT in Ireland in order to alleviate cash flow impacts for business. If the proposed legislation is introduced, importers registered for VAT in Ireland will be able to avail of postponed accounting for VAT. Under this system (similar to the UK system), importers will not pay import VAT at the point of entry but instead will account for it through their bi-monthly VAT return. This should eliminate any potential cash flow issues for traders.

Import VAT Rate Differentials

Import VAT is charged at the point of importation at the same rate that applies to similar goods sold within the importing country. The standard rate of VAT in Ireland, which applies to most goods, has been temporarily reduced from 23% to 21% for a period of six months up to 28 February 2021.The standard rate of Import VAT in the UK is 20%.

When the UK falls outside the EU VAT regime, most goods imported into the UK from Ireland should be subject to UK Import VAT at 20%, while goods imported into Ireland from the UK should be subject to Irish import VAT at the prevailing standard rate (21% or 23%) or a reduced rate where appropriate.

However, as many food products are subject to the zero rate of VAT, many products emanating from the food and beverage industry should be subject to a zero rate of Import VAT. Nonetheless, certain 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, sports drinks and ice cream are all subject to the standard rate 20% rate in the UK. It is worth noting that the UK has also introduced a reduced VAT rate of 5% on some hot foods and takeaways which is expected to last until January 2021.

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, and certain insurance and transportation costs (but not including VAT).

Economic Operators’ Registration and Identification (EORI)

One critical step for many businesses in terms of Brexit readiness is to register for an EORI number. The EORI is an identification number valid throughout the EU and used by traders importing and exporting goods in and out of the EU. This number harmonises the importation process and the number can be used to identify the trader at any point of entry into the EU. You may apply to have your EORI number match your VAT number (if applicable). When the UK leaves the common trading area on 31 December 2020, an EROI will be required for exports to or imports from the UK (with the exception of Northern Ireland). Registration for an EORI number can be done via the Revenue Online Service. You must be registered for customs and excise taxes to be eligible to apply for an EORI.

Authorised Economic Trader (AEO)

Also certain traders with operations within the EU can apply for AEO status which is an internationally recognised standard whereby an importer / exporter is designated as a trusted trader. Trusted traders get the benefit of simplified customs procedures bringing faster and more efficient clearance of goods at frontiers which could prove invaluable post the transitional period in the event of a hard Brexit. However, not all businesses will be eligible for AEO status. Businesses should check their eligibility to apply for AEO status given the benefits it offers.

Irish Government Brexit proofing

The government launched the Future Growth Loan Scheme in 2019 in efforts to support agricultural and fisheries businesses to strategically invest in their businesses. The scheme was expanded in 2020 from €300m to €800m to inject vital cash flow into key industries to help weather the economic storms brought on by Brexit and the COVID pandemic. Eligible businesses can now avail of loans of between €25,000 and €3m for terms between 7 and 10 years. Loans of up to €500,000 can also be drawn down without any security. The Brexit Loan Scheme also remains open to businesses which can demonstrate they will be particularly affected by Brexit (assessed by reference to their level of turnover arising from imports / exports with the UK). The scheme provides for loan amounts of between €25,000 to €1.5m, for periods of up to 3 years, with a maximum interest rate of 4%. Loans of up to €500,000 may be unsecured. The scheme also provides for optional interest-only repayments at the start of the term. 40% of the value of these loans has been earmarked for food businesses.

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.

In September 2020, the Irish Government published a Brexit Readiness Action Plan to assist Irish businesses prepare for the end of the transition period and the likelihood of a “hard” Brexit under WTO rules. The Plan has provides useful advice and information resources on importing and exporting after January 2021, with specific recommendations for the agri-food sector.

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

• Prepare for the new technical requirements for importing and exporting to the UK, including in relation to rules of origin, labelling, and registering with government departments or HSE for moving animals, plants or animal or fish products, and food of non-animal origin;

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

• Complete EORI registration

• Consider application for deferred payment authorisation

• Consider AEO application, if available.

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

• 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

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.

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