Back to Brexit Basics

Brexit

Last week, in Series 11 of Back to Brexit Basics, we looked at how Brexit could give rise to an upfront VAT cost on trade between Ireland and the UK.  This week we look at supply chain management and what businesses could be doing now to prepare for Brexit. By failing to prepare….. Today, supply chain management is a key element of many business operations and for some it is critical for success.  The processes involved in the production and distribution of a product make up the supply chain.  Good supply chain management can reduce a business’s operating costs, improve its profit margins and keep customer satisfaction levels high. Many businesses in Ireland and the UK manufacture products that are made up of various components which are sourced from both the UK and the EU.  This could mean multiple border crossings where parts are brought together to produce the final product.  The introduction of any customs checks and duties at borders after Brexit could make this practice time consuming and costly. In addition to these customs and VAT costs that may arise for traders after Brexit, businesses should examine their supply chains to assess exactly where they could be potentially faced with delays and costs in the movements of their goods.  For example, depending on the outcome of the Brexit talks, familiar transit routes may not be as convenient or as accessible as they were before Brexit and traders may need to alter or establish new transit routes in order to remain competitive.  The future trading landscape after Brexit is not yet clear and this makes it difficult for businesses to consider and substantiate the real impact of Brexit now.  Making changes to a supply chain at this stage in the negotiations may seem, and indeed be, premature.  However planning for some eventualities (such as a hard Brexit) is recommended and traders whose supply chains crosses UK and Ireland borders should consider undertaking a review of their business processes so that they are in some way prepared for any changes ahead.  We have set out below some things businesses might consider when examining a supply chain. Identify the stages of a supply chain Companies should examine their entire supply chain operation from start to end. This will involve looking at where and how raw materials are sourced, where production processes take place, how goods are packaged and stored, loaded in lorries or other modes of transport and how they are shipped to their required destination. Businesses will need to establish how and when goods move in and out of the UK and the EU and examine the points in the supply chain which may cause difficulties after Brexit.  Assess the infrastructure Traders should assess the road and seaport infrastructure that they currently use or is available to them. They should carry out cost and time comparisons between various transit routes.  Traders may need to switch from road to direct shipping routes to avoid border crossings.  This means that the cargo will go directly from the factory to the customer without first stopping at a warehouse or other facility and the ability of infrastructure to cope with this will need to be established.  Examine product lead time Product lead time is the amount of time that elapses between when a process to make a product starts and completes. Additional customs checks, new compliance requirements or different transit routes may result in longer product lead times.  Traders will need to work out the product lead times for each product in an after-Brexit scenario and if required may need to alter some components of their supply chain.  This may involve sourcing other component suppliers or taking a different transport route, or even changing the product. Increase storage Other traders who source product components from the UK to manufacture in the EU or vice versa may consider increasing the size of their storage facilities so that they can make fewer trips cross-border to deliver components.   Monitor stock levels Businesses will also need to monitor their stock levels carefully, particularly those who operate a Just-in -Time operating model.  Any delays at the borders could affect this model, resulting in low stock levels or delays in the production process. The capacity of a business to deal with product lead time disruption needs to be examined and a cost analysis carried out. Driving time Companies may need to consider changes to current logistics patterns to optimise driving time for transporting goods.  The EU for example has common rules for maximum daily driving times as well as daily minimum rest periods for certain classes of drivers: extra customs checks may require a change to current timetabling and planning.  Failing to prepare…. As noted above, it is difficult for businesses in Ireland and the UK to plan and adapt for Brexit given that we do not know the trading landscape that we will face after Brexit. However, it may be worthwhile for businesses in Ireland and the UK to examine their supply chains to fully understand how any Brexit outcome could affect them.  As the saying goes, by failing to prepare, you are preparing to fail.  Read all of our Brexit updates and Back to Brexit Basics on the dedicated Brexit section of our website.    

Jul 03, 2018
Brexit

Last week, in Series 10 of Back to Brexit Basics, we looked at the three customs options that are currently on the table in the Brexit debate.  This week we look at how Brexit could give rise to an upfront VAT cost on trade between Ireland and the UK and we examine a solution to this cash flow issue. Measuring the VAT cost of Brexit The way VAT arises on goods imported into Ireland from the UK and into the UK from Ireland will change after Brexit.  At the moment, both the UK and Ireland are EU Member States and such goods are treated as intra- community acquisitions.  The purchaser is required to self-account for VAT on a reverse charge basis.  This means that the purchaser has to account for the VAT on the purchase of goods from the other EU Member State.  For business to business purchases, the supply is zero-rated in the Member State of dispatch and the purchaser accounts for VAT in their VAT return that is due for the period in which the acquisition took place. The rate of VAT is the rate that would apply in the purchaser’s Member State.  If the purchaser is entitled to an input credit for the VAT payable on acquisition, they can claim this on the same VAT return.   For example: A trader in Ireland purchases goods to the total value of €10,000 from the UK in May 2018.  These goods will be onward sold as taxable supplies in the Irish business.  The UK company does not charge VAT on the supply to Ireland and instead the Irish trader charges themselves VAT at the rate applicable in Ireland (23%) which amounts to €2,300.  The Irish trader can then also claim an input credit of €2,300 as the goods were purchased for taxable supplies (and assuming the purchase is deductible for tax purposes).  Therefore from a cash flow perspective, no VAT is payable on the VAT return in respect of this transaction. After Brexit Looking at this scenario after Brexit, the goods purchased from the UK into Ireland will be regarded as imports from a country outside of the EU.  For imports from outside the EU into the EU, importers must pay the VAT to the Revenue Commissioners in Ireland, or HMRC in the UK, at the time when the customs duties are paid rather than  at the time of filing their VAT returns. Imported goods are liable to VAT at the same rate as applies to similar goods sold in the importing country.  The value of the imported goods for VAT purposes includes customs duty, anti-dumping duty and excise duty (excluding VAT), and certain transport, handling and insurance costs. Therefore taking the above example, the VAT of €2,300[1] that arises for the Irish business on the goods imported into Ireland from the UK becomes payable to Revenue in Ireland immediately on importation in May 2018.  The Irish trader then claims an input credit of €2,300 in the May/June 2018 VAT return which is filed weeks later in July 2018 (assuming returns are filed bi-monthly).  In contrast to the intra-community acquisition scenario, the Irish trader in this situation has an upfront cost of €2,300 which it can’t claim as a deduction for several weeks.      It should be noted that at the moment for imports from outside the EU into Ireland, most traders have a deferred payment account with Revenue which means that the amount of VAT that is due is not taken from the traders account until the 15th day of the month following importation.  However for many traders that only trade with the UK or other EU Member States, they will not have a deferred payment account with Revenue. A possible solution? A possible solution to this problem in Ireland, at least for some traders, is the postponed method of accounting for VAT which is provided for in Article 211 of EU Council Directive 2006/112/EC. The UK’s replacement of EU VAT legislation could permit an equivalent solution as part of the exit arrangements with the EU. Under postponed accounting, importers do not pay import VAT at the point of entry but must declare the payment of their import VAT in the next VAT return period and deduct the relevant input VAT in the same VAT return.  The effect is comparable to existing mechanisms for cross border trade within the EU described above.  Update: Both the UK and Irish government have said that they will implement the postponed method of accounting for VAT in the event of a no-deal Brexit. Adopted in several other EU Member States Several other EU Member States such as Bulgaria, Poland and Romania have already adopted the postponed method of accounting into domestic legislation and it is felt that an adoption of the provisions by Ireland and the UK would benefit Irish and UK businesses greatly in light of the level of trade between Ireland and the UK. The majority of EU countries that have adopted the postponed method of accounting have land borders with non-EU countries and trade with these countries. This highlights the importance of the method and will be paramount given the land border on the island of Ireland. Leaving the EU without this or a modified version of this proposal in place in either the UK or in Ireland, would mean a cash flow benefit of VAT payable on imports for each exchequer but the cost of this would be borne by businesses that need to pay the VAT up front and then recover later. This would create cash flow costs and administrative burdens – all generated by Brexit – and none of which exist at present.  Chartered Accountants Ireland has been calling for the introduction of the postponed method of accounting for VAT for the past 12 months and has this week issued a joint press release with the Institute of Chartered Accountants of Scotland (ICAS) calling for action. Read all of our Brexit updates and Back to Brexit Basics on the dedicated Brexit section of our website. [1] Assuming that €10,000 represents the total value for VAT purposes

Jul 03, 2018
Brexit

Last week, in Series 9 of Back to Brexit Basics, we looked at equivalence and what this process entails.  This week we look in more detail at the three customs options that are currently on the table in the Brexit debate.  The customs options  The UK government outlined two potential options to solving the customs problem in a policy paper prepared last year.  These options were debated by the UK government this week and a third option has now emerged as a possibility. All three options need to be considered by the EU and limited detail is available on the mechanics of each. A customs partnership This option would involve the UK acting on behalf of the EU when imports arrive into the UK from the rest of the world and are then transported on to the EU. In practice, this means that the UK would potentially have to apply the EU’s tariffs that arise on imports that arrive into the UK that are ultimately destined for the EU. For example if electrical parts or machinery arrive at a UK port from the US and are then shipped on to Rotterdam, customs officials in the UK would collect the customs duty due and pay it over to the EU. Some suggestions put forward by the UK government on how to manage this system include using an IT system to track goods to see where they ultimately end up and working out the correct tariffs.  Alternatively importers could pay the higher EU or UK tariff and then claim a refund if necessary once the goods reached their final destination. This system is unprecedented and untested and the EU has been reported as being sceptical of it.  One advantage of the system is that it could still allow the UK to negotiate its own trade deals around the world.  The max-fac option A second proposal known as maximum facilitation or “max-fac” seeks to create as frictionless a border as possible rather than remove the border entirely. The UK has said that this type of border would use new technologies that could remove the need for physical customs checks.   Schemes which can fast-track customs procedures (such as the authorised economic operators scheme) could also be used to make trade with the UK and the EU easier.  This type of border could require the EU to implement equivalent arrangements on its borders. Special arrangements may also need to be made for Northern Ireland if this option was to be considered in order to avoid a hard border. The EU has said that it is open to examine any option that would facilitate freer trade but some of the technology needed to operate such a border has not been developed yet. The third proposal A further option put forward by Theresa May in recent days looks at the possibility of the UK in its entirety remaining in line with the EU Customs Union for several years. Paragraph 49 of the draft Withdrawal Agreement reached in December 2017 between the EU and the UK states that in the absence of any other way of avoiding a hard border, the UK would, "maintain full alignment with those rules of the internal market and customs union which support north-south cooperation, the all-island economy and the Good Friday Agreement". While the EU have said that this provision could see Northern Ireland still remain within the EU Single Market and Customs Union, the UK is understood to be examining the possibility of the entire UK remaining aligned with the EU Custom Union and not just Northern Ireland. If this worked, it could mean no customs checks on the Irish Sea, or on the border between Northern Ireland and Ireland.  This temporary solution could solve the issue of the hard border for now. Read all of our Brexit updates and Back to Brexit Basics on the dedicated Brexit section of our website.  

Jul 03, 2018
Brexit

Last week, as part of Series 8 Back to Brexit Basics, we looked at what losing passporting rights might mean for the UK.  This week we look at equivalence and what this process entails. Equivalence  Should the UK lose passporting rights when it ceases to be a member of the EU and EEA, a possible option for the UK could be to apply to the EU for equivalence.  Equivalence can in some cases allow countries from outside the EU to access the Single Market in limited circumstances. According to the European Commission, equivalence means that one country declares that the standards of another in a defined area are sufficiently close to its own to be deemed ‘equivalent.’  It is the basis for granting a non-EU banks and financial services firms certain rights in the EU financial services market.  Equivalence cannot give full passporting rights to non-EU banks or financial services firms.  The EU market access rights available under equivalence are considered to be narrower, more onerous and more unstable. Many banking and financial services cannot be provided at all via equivalence.  For example, there is no equivalence regime applicable for UCITS (Undertakings for Collective Investment in Transferable Securities) which allows the marketing and sale of certain funds.  How is equivalence determined?  Equivalence is not negotiated but requested from the European Commission.  Assessments are launched at the discretion of the European Commission and a detailed assessment of the regulatory regime of the third country is carried out.  Determining equivalence is not based on a direct or exact transposition of EU laws into another country’s rules. Rather it is a close comparison of the intent and outcomes of the EU system and that of the other country.  The length of the process may also vary considerably as the European Commission has no fixed deadlines for completion.  Some research has found that the process can take between two and four years.  If the equivalent country changes its rules in any way that materially affects a judgement of equivalence, equivalence and any rights based on it can be removed. This can also result from the EU changing its own rules.  Equivalence can be revoked with only 30 days’ notice and this could make long term investment plans difficult.  Decisions on equivalence are listed on the European Commission website.  Read all of our Brexit updates and Back to Brexit Basics on the dedicated Brexit section of our website.  

Jul 03, 2018

Last week, as part of Series 7 Back to Brexit Basics, we looked at some of the elements of EU passporting for financial services.  This week we examine what a loss of passporting rights might mean for UK financial services companies. What is the risk for the UK in terms of passporting?  When the UK leaves the Single Market, it is likely that it will lose its passporting rights.  The EU has been clear throughout the Brexit process that there can be no cherry picking on aspects of Single Market membership. What does this mean for the UK? Once the UK leaves the EU and the EEA, it will become a third country for passporting purposes and there may be restrictions to the UK’s access to EU markets for providing financial services.  This will affect: the ability to passport out of the UK into the EU the ability to passport into the UK from the EU The loss of a passport for existing UK-based financial service entities may result in those financial groups having to establish authorised or licensed entities in another EU territory if they want to continue selling their services to EU customers across the Single Market.  Likewise, EU entities passporting into the UK would likely have to set up an entity in the UK to provide financial services in that jurisdiction. Retaining its passport, joining the EEA (which is unlikely given the current debate) or obtaining regulatory equivalence with EU rules (discussed next week as part of Back to Brexit Basics) are two of the ways that UK financial services companies operating in the EU can continue to operate as they have been after Brexit. Applying the rules – how passporting works  As noted in Series 7 of our Back to Brexit Basics, there are several different passports that banks and financial services providers rely on in order to provide core banking services to businesses and customers across the EU.   Broadly for example, the banking passport relies on two key pieces of EU legislation: the Capital Requirement Directive (CRD) IV and the Markets in Financial Instruments Directive (MiFID).  CRD ( IV) allows banks to provide deposit-taking, lending and payment services, while MiFID allows them to provide advisory services, investment services and portfolio management.  Once a bank is established and authorised in one EU country, it can generally apply for the right to provide certain services throughout the EU or to open branches in other countries across the EU with relatively few additional authorisation requirements.  When the UK leaves the EU, branches of UK banks in the EU will revert to being foreign bank branches.  Branches of EEA/EU banks in the UK could also lose their own passporting rights.  For EEA countries that are only in the UK, this could mean losing their entire access to the EU.  Practical example of how passporting works A company in Spain wants to raise funds to upgrade its wholesale operations in Germany and expand.  It looks to a UK based bank for assistance for the funding of the plans. A UK bank uses its CRD passport to provide advice on securing a loan from a group of UK based banks.  The UK based bank uses is MiFID passport to assist the Spanish company sell investments to increase the funds available to them to fund some of the planned expansion  The UK bank uses its CRD passport to provide foreign exchange services (Sterling/Euro transactions). The bank uses its MiFID passport to help hedge FX exposure on the Sterling.  And also hedge interest rate exposure on Euro/Sterling elements of financiering.  Without passporting or any form of equivalence to EU standards, the UK bank would not be able to sell financial services to the Spanish company from the UK based bank.  The Spanish company would have to seek financing elsewhere outside of the UK and within the EU.  For the UK bank, this means a loss of business.  The UK bank could choose to locate in the EU to provide the services in the EU – but this will be costly.  It’s important to note that passporting isn’t necessary in wholesale markets. As passporting only grants the rights to sell, a Spanish bank in the example above could still buy an interest rate hedging product from London.  But banks in the UK would not be able to actively sell and advertise in the EU – they would rely on the Spanish bank calling them up.    Next week we will look at equivalence with EU rules and what this could mean for UK financial services. Read all of our Brexit updates and Back to Brexit Basics on the dedicated Brexit section of our website.  

Jul 03, 2018

In Series six, we looked at Common Transit procedures which simplify customs procedures when goods move through a number of countries to reach their final destination. In this series we explore some of the elements of EU passporting for financial services What is EU Passporting? Passporting was introduced by the EU in 1995 meaning that the freedoms and rules of the EU’s Single Market were extended to trade in financial services.  In accordance with the rules of the Single Market, there is a single EU rule book for financial services.  Financial regulation and supervision standards are therefore harmonised across the EU. The EU passporting system for banks and financial services companies enables firms that are authorised in any EU or EEA (Norway, Iceland, Lichtenstein) state to trade freely in any other state with minimal additional authorisation using passports. Financial services firms typically passport by either selling the services cross-border from an EU home ('freedom of services' basis) or by establishing a branch in another EU member state ('freedom of establishment' basis). Types of passports There are several different passports that banks and financial service providers rely on in order to sell core banking services to businesses and customers across the EU.  Each of the passports is embedded in a particular EU directive or Regulation establishing basic rules for that activity.  Many banking services involve activities covered by more than one passport. Each Member State signs up to the required passport(s) and applies that regulatory regime into their own national law so that firms can follow these rules. Passports are based on EU rules so are not readily available to firms based in countries outside of the EU/EEA.  Non-EU/EEA firms may face regulatory barriers therefore when trying to provide cross border banking and investment services to customers in the EU. Two important features of passporting: It enables banks and financial services firms to sell products and services across EU borders on the same basis as if they were present in the market of sale. It enables banks to establish branches in other EU/EEA countries on preferential terms.EU national authorities are required to treat branches of EU/EEA countries as if they were locally authorised. For example, this has enabled the UK based banks to establish networks of branches in financial centres across the EU and many banks from the EU to establish operations in UK.  

Jul 03, 2018

Series five looked at how customs procedures could be simplified in instances where traders obtain Authorise Economic Operators or AEO status.  This time we look at Common Transit procedures which simplify customs procedures when goods move through a number of countries to reach their final destination. Common Transit Common Transit is an EU customs procedure that allows goods to move between the EU and common transit countries or between the common transit countries themselves with duty being paid in the country of final destination.  This procedure facilitates the movement of goods by temporarily suspending duties and other charges on imported goods until they reach their final destination. Common Transit may therefore be useful for road freight that transits from Ireland through the UK to mainland EU or from the UK through the EU to Asia for example. The Common Transit Convention does not not deal with regulatory checks – such as sanitary checks on agri-food products. Nor does it deal with the ability for road hauliers to operate in the UK, The common transit countries are Switzerland, Norway, Iceland and Lichtenstein (the EFTA countries), Turkey, Macedonia and Serbia. Each member state and common transit country has designated customs offices.  Import charges on goods that move under the common transit convention are suspended and collected at the customs office of destination in the member state and not at the external frontier.  This means multiple customs charges do not arise. UK to become a party to the convention The UK announced on 17 December 2018 that it will become a party to the Common Transit Convention in its own right regardless of what Brexit deal is reached. Read the statement. The Institute welcomed this announcement and you can read our press release here.  The administration In order to avail of the benefits of the common transit area, declarations under the common transit system must be made electronically at the place of departure, using the New Computerised Transit System (NCTS) which is used by all common transit countries. A Transit Accompanying Document known as a TAD must accompany the goods during transit and be presented along with the goods at an office of transit or at the office of destination. The movement of goods under common transit ends when the goods and the TAD are presented at the approved office of destination.  In addition to the Common Transit procedure, there are two other transit procedures: 1. Union Transit, where the transit operation only covers the movement of goods within Union (EU) territory (and Andorra and San Marino). 2. TIR (Transports Internationaux Routiers) where the movement includes movement over Union territory and one or more third countries which are party to the TIR Convention 1975. More information can be found in the European Commission’s Transit Manual.  

Jul 03, 2018

Series four looked at the EU customs regime and how it applies to trade with countries outside a customs union with the EU or where a free trading agreement is in place.  This series examines some procedures that are currently in place within the EU customs regime to make customs administration more simplified in certain instances. Authorised Economic Operator status Authorised Economic Operator (AEO) status is a certified authorisation issued by customs administrations in the EU for traders involved in customs declarations which allows a trader to be recognised worldwide as a safe, secure and compliant trader in international trade.  AEO is not mandatory but it does give faster access to certain simplified customs procedures and in some cases, shipments can be fast-tracked through customs procedures.  The AEO status also indicates that a trader’s customs controls and procedures are efficient and compliant. According to the European Commission, other benefits which arise are: Priority treatment if selected for checks Possibility to request a specific place for customs controls Lower inspection costs Reduced theft and losses Fewer delayed shipments Improved planning Improved customer service There are generally three types of AEO status.  Traders authorised for customs simplification (an AEOC), traders authorised for security and safety (AEOS) or a combination of the two. The AEO status granted by one member state is recognised by the customs authorities in all member states. Any trader established in the EU who is part of an international supply chain and is involved in customs activities can apply to their country’s customs authority for AEO status (so the Revenue Commissioners for traders established in Ireland).  For example, manufacturers, exporters, warehouse operators, clearance agents, importers or freight forwarders can all apply for AEO status. They just need an EORI number to do so.   Traders require AEO status if they wish to qualify for, among other things, moving goods in temporary storage between different member states without attracting multiple customs charges. The EU AEO database allows anyone to check who holds an AEO status, what type it is, and the date and country of issue.  AEOs are entitled to use the AEO logo as long as they have a valid AEO status.  The logo is provided by the issuing Customs Authorities (the Revenue Commissioners in the case of Irish established traders). Revenue.ie has further details about AEOs.  

Jul 03, 2018

Series three looked at what the trading landscape would look like if the UK and EU did not agree a trade deal when the UK leaves the EU and trade defaulted to World Trade Organisation (WTO) rules where customs duties would arise. In series four we look at how the EU’s customs regime works in practice where countries who are not in a Customs Union with the EU or do not have a free trade agreement in place trade with the EU. Operation of the EU Customs Regime Import charges and customs checks are operated where trade takes place with a country outside the customs union with the EU or where a free trade agreement is not in place.  Import charges can comprise of Customs Duty, Excise Duty and VAT.  Anti-Dumping Duty and Countervailing Duty can also be imposed. In the context of Brexit, if the UK leaves the EU’s Customs Union, there are likely to be customs checks between the EU and UK as a third country after Brexit.  There may also be a requirement for customs checkpoints and an IT infrastructure associated with customs payments and declarations. Duty on goods from outside the EU’s Customs Union is generally paid when the goods first enter the EU and after that there is nothing more to pay and no more checks if goods move across the EU. How to make a Customs declaration for importing goods The importer of the goods or a customs agent generally lodges a customs declaration with the customs office where the goods will be presented.  The declaration can be made on a Single Administrative Document (SAD) which is filed electronically (using the dedicated online system used by the exporters country) or in writing.  For travellers and non-traders, these declarations can be made orally. What is a SAD? The SAD form shows details of the exporter and the importer, the country of export, origin and destination, the value of the goods and currency, the mode of transport of the goods, the weight of the goods among other details.  It is used by EU member states and each country’s version is harmonised with other EU member states. The SAD was introduced to control goods arriving from outside the EU and goods being exported outside of the EU.  The SAD is not used for trade within the EU Single Market. The SAD also covers the movement of non-EU goods within the EU. Traders moving goods between European countries don’t need to complete a SAD. The aim of the SAD is to encourage openness in national administrative requirements as well as standardising and harmonising data to reduce the administrative burden on traders. In addition to detailing what the goods are and the movement pattern of the goods, two of the most important pieces of information required in the SAD electronic customs declaration (which is also known as an import declaration) are the Commodity Code and the Customs Procedure Code.  A Commodity Code for imports is a ten-digit number which equates to the description of the goods being imported and determines the rate of customs duties applicable.   Information on Commodity Codes can be obtained by accessing an EU database called TARIC.  The importer is responsible for correctly classifying their goods on import and export. The Customs Procedure Code describes the procedure and/or regime under which the goods are to be placed.  For example the regime can include removal from a customs warehouse or entry into a free zone. How are charges calculated? 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. Customs Duty is charged on the price paid for the goods including local sales taxes (VAT equivalent) plus shipping, packaging and any insurance costs. Invoices which are declared in currencies other than the Euro will need to be converted to Euro.  This allows the correct import duty to be calculated.  The EU publishes monthly exchange rates. Excise Duty is charged on alcohol, tobacco and oil products and is in addition to Customs Duty. VAT is charged at the point of importation at the same rate that applies to similar goods sold in the importing country. The value of the goods for the purpose of calculating the amount of VAT payable at import is their value for customs purposes, described above, increased by the amount of any duty or other tax (but not including VAT). Accounting for VAT For imports from outside the EU into the EU, importers must pay the VAT to the relevant tax authorities at the time when the customs duties are paid rather than declare it at the time of filing their VAT returns.  This position differs when businesses acquire goods within the EU. In these instances acquisition VAT must be accounted for in the next VAT return rather than being payable upfront. An example of how customs and VAT are applied is illustrated below. Goods Invoice Price Shipping and Insurance Value for Customs Purposes Customs Duty % Value for VAT Purposes VAT   % Total Charge Total Cost Digital Cameras €600 €66 €666 0% 0 €666 23% €153.18 €153.18 €819.18 Adult Footwear €900 €112 €1,012 17% €172.04 €1,184.04 23% €272.33 €444.37 €1,456.36   How are charges paid? Once an electronic customs declaration has been lodged and accepted by the tax authorities, payment must be secured before the goods are released to the importer.  Some payments are made upfront while other importers may be able to avail of a delayed payment mechanism. What documents need to accompany the customs declaration? When submitting a declaration electronically, accompanying documents for customs inspection/audit must be retained for a period of three years from the end of the year in which the goods are released from Revenue control. Examples of supporting information required are: the invoice on which the customs value of the goods is declared documents required for preferential trade agreements or other reliefs from duty import licences or other documents required under provisions governing the release for free circulation of the goods Customs warehousing A customs warehouse allows traders to store goods with customs duty or import VAT payments suspended.  Once goods leave the warehouse, duty must be paid unless they are re-exported or move to another customs procedure.  Traders can store goods in a customs warehouse if they are dutiable goods from outside the EU or moved from another EU country under duty suspension.  Traders can also put goods into a customs warehouse if they don’t know the final destination of the goods when they come into the EU or paperwork has been delayed.  

Jul 03, 2018

In series two, we touched on what would happen if the UK and EU did not agree a trade deal when the UK leaves the EU and trade defaulted to World Trade Organisation (WTO) rules.  In this series, we look at these rules more closely. Trading in this manner would mean that the EU countries will have to treat the UK in the same way that it treats all other WTO members in that position, such as USA or Russia.  This means that EU tariffs would have to apply to imports from the UK.  Ireland would apply the EU tariffs to imports from the UK.   It would be against the WTO’s principles for the EU not to place tariffs on UK imports after Brexit if there was no free trade agreement in place. The same is relevant on the UK side. What exactly is the World Trade Organisation? WTO is a forum for governments to negotiate trade agreements in order to liberalise trade and settle trade disputes.  The WTO currently has 164 members which between them are responsible for 95 percent of world trade.  The EU is a member of the WTO and Ireland and the UK have both been members since 1 January 1995 when it was founded. WTO agreements, which cover goods, services and intellectual property, are contracts, binding governments to keep their trade policies within agreed limits.  A key principle of the WTO is that countries do not discriminate against one another when it comes to trade.  There are two main barriers to trade; tariffs and non-tariff barriers. Status of the UK post Brexit The UK is a member of the WTO in its own right, having co-founded the General Agreement on Tariffs and Trade (GATT), the WTO’s predecessor, with the other 22 countries in 1948. It’s understood that the UK does not have to reapply to join the WTO once it leaves the EU. However, at present the UK operates in the WTO under the EU’s set of ‘schedules’ – a list of commitments that sets the terms of the EU’s tariffs, its quotas and its limits on subsidies. The UK has provisionally said that its schedules will largely mirror the EU schedules after Brexit. What are WTO schedules? WTO obligations known as schedules are a form of passport for taking part in international trade networks and map out a country’s tariff and subsidy regimes.  The schedules comprise of 22,500 pages listing individual countries commitments on specific categories of goods and services. How does the WTO tariff system work? Tariffs are duties applied as a percentage of value or per unit of quantity or weight.  In some instances, the two methods are combined, for example a 12.8 percent of the value of the product plus a fixed amount per kg.  Tariffs are payable by the importer. What is the Tariff coding system? All trade products are coded.  The broadest categories of products are identified by two-digit chapters e.g. 04 is dairy products, eggs and other edible animal products.  These are then sub-divided by adding more digits – the higher the number of digits, the more detailed the categories. For example the four-digit code 0403 is a group of products derived from milk. At six digits, 0403.10 is the sub-heading for yoghurt; at the eight digit level, 0403.10.11 this could be low-fat yoghurt tariff line. The codes are standard up to the first 6 digits. What level of tariffs could apply? The following are the EU bound tariffs on trade with third countries – these are the tariffs that could typically apply on imports into Ireland from the UK and vice versa (if the UK adopts the EU’s schedules) Solid fuel – 0% Electrical machinery (average 1-3%) Live horses 11.5% Frozen offal of sheep, goats, horses – 6.4% Ham – 15.4% Certain Fresh or chilled freshwater fish – 22% (most fish attract tariffs of 2% to 22%) Natural honey -17.3% Animal fats 3% - 12% Fruit can be up to 26% Most favoured nation principle Under WTO rules, each member must generally grant the same ‘most favoured nation’ (MFN) market access, including charging the same tariffs, to all other WTO members.  There can be no discrimination. The MFN principle applies to trade in goods, services and some intellectual property.  An example So let’s assume that Chile, Columbia and Peru are WTO Members. The MFN principle would prohibit Chile's customs authorities from levying a customs duty of 10 percent for imported watches originating in Columbia, while levying a lower customs duty of 5 percent for imported watches originating in Peru.  The MFN principle requires that the WTO favourable treatment (5 percent) be granted automatically and unconditionally to imported watches originating from all WTO members.  What are non-tariff barriers? Non-tariff barriers include quantitative restrictions (quotas) among other things such as lack of transparency in trade regulation. Quotas are in place to regulate the volume of trade between countries.  Quotas must be imposed on a non-discriminatory basis.  In other words, the Member imposing the quotas is not allowed to favour any country over another. The Member is expected to impose quotas across the board. When imposed, quotas should not distort ordinary trade flows. Therefore quotas should be applied equally to goods from all origins and their allocations should correspond as closely as possible to the expected market shares that would have existed in the absence of quotas. Finding more information on the WTO In order to research tariffs, do the following: Go to the database. For standardized tariff information at Harmonized System six-digit level, go to the WTO Tariff Download Facility. To see a country’s tariffs in detail or to compile analytical reports go to Tariff Analysis Online, and its brief explanation and user guide Links to this information are available on each WTO member country’s information page on the WTO website. To reach these, go to the list of members and click a country’s name.  

Jul 03, 2018

Series one looked at why the Brexit vote took place in the first place. In the second in our series, we look at some common terms that crop up time and time again in the Brexit debate starting off with the document that triggered the UK’s departure in the first place; Article 50. What is Article 50? Article 50 of the Lisbon Treaty is the legal agreement, signed by all EU members, which gives any EU member the right to leave the EU. The article outlines the procedure for doing so while also instilling a two year time limit in reaching an agreement, unless all members agree to extend it. It’s only five paragraphs long. What is a hard and soft Brexit? The terms relate to the UK’s relationship with the EU post Brexit. A hard Brexit could see restrictions on the free movement of people and trade as well as physical infrastructure at the border between Northern Ireland and the Republic of Ireland.  A soft Brexit would be seen as free movement of people and goods. What is the Single Market? The Single Market was completed in 1992 and represents what the EU stands for. It essentially allows all Member States to act as a single entity.  It’s based on four freedoms; free movement of goods, services, money and people within the EU and its objective is to boost trade, increase employment and lower prices by eliminating tariffs, quotas and taxes on trade.  The Single Market also removes certain non-tariff barriers to trade by having common regulation on packaging, safety and standards.  The aim is to create a level playing field and a single market across industries by standardising regulations, work hours, health and safety among other things. A recent example of how the Single Market operates is the EU vacuum cleaner regulations which ban the manufacture or sale of vacuum cleaners across the EU with motors more powerful than 900W.  The EU Single Market rules also limit how noisy the cleaners could be and stipulated other minimum durability requirements. In terms of free movement of people, the Single Market allows German people to live in the UK and Britons to live in Spain.  But there are limits on the number of Turkish people or Russian people that can live in the UK. The Single Market extends to Norway, Iceland, Liechtenstein and Switzerland despite these countries not being members of the EU.   What is a Customs Union? A Customs Union is a group of countries that have agreed to allow free trade between themselves and charge the same import duties as each other to other non-member countries.  Once goods have cleared customs in one country, they can be shipped to other countries in the Customs Union without further tariffs being imposed. Turkey is in a Customs Union with the EU but is not a member of the EU.  A Customs Union means Turkey and the EU can trade freely with each other without customs checks at the borders. Turkey must charge the same customs duties to countries outside the EU as the EU does and there are limitations on Turkey being free to strike its own trade deals. What is the difference between a Customs Union and the Single Market? A Customs Union generally only covers free trade, while the Single Market allows free movement of goods, people, services and money. Some countries outside the EU are in the Single Market but not the Customs Union. For example, Iceland is a member of the Single Market but not the EU while Turkey is outside the EU Single Market but inside the Customs Union. What happens if the UK leaves the EU’s Customs Union? Unless the UK agrees a free trade agreement with the EU, UK imports into the EU will suffer the EU’s common external tariff which could range from 1 percent right up to in excess of 50 percent depending on the good.  There would also be checks at borders with the EU and this causes issues for Ireland and Northern Ireland. What is a free trade area? In a free trade area, there are no tariffs or quotas on goods or services which move freely. Parties to a free trade agreement are free to make their own trade deals with other countries. The objective is to increase trade of goods and services with each other. For example in September last year, the EU and Canada reached agreement on free trade under an agreement entitled Comprehensive Economic and Trade Agreement (CETA). It’s estimated that this agreement will save EU businesses €590 million a year which is the amount they pay in tariffs on goods exported to Canada.  CETA removes duties on 98 percent of products that the EU trades with Canada. What if the UK leaves the Customs Union and does not agree a free trade agreement with the EU? If this happens, trade between the UK and the EU will operate under World Trade Organisation (WTO) rules which means tariffs and quotas may apply. The EU countries will have to treat the UK in the same way that it treats all other WTO members in that position, such as USA or Russia.  This means that EU tariffs would have to apply to imports from the UK. Ireland would apply the EU tariffs to imports from the UK.  It would be against the WTO’s principles for the EU not to place tariffs on UK imports after Brexit if there was no free trade agreement in place. The same is true on the UK side.  If the UK wants to apply any tariffs on any country, these will also have to apply to the EU if there is no deal.  

Jul 03, 2018

In the first in our new series of getting back to the basics of Brexit, we examine how the vote to leave the EU came to pass in the first instance.  The UK people historically voted to leave the EU by referendum on 23 June 2016.  Article 50 of the Treaty of Lisbon, the mechanism by which the UK must leave the EU was triggered on 30 March 2017 and gave the UK two years to leave. This means the leaving date has been set as 29 March 2019. What is Brexit? It’s a merge of the words Britain and exit.  The term can also be found in the Oxford dictionary where it is defined as “the withdrawal of the United Kingdom from the European Union.”  How did each part of the UK vote? The UK voted by a majority of 51.9 percent to 48.1 percent to leave the EU.  More than 30 million voted in total representing 72 percent of the population.   England and Wales voted to leave the EU with 53 percent and 52 percent of the votes respectively.  Scotland backed to remain in the EU with 62 percent of the vote and 56 percent of Northern Ireland voted to remain. Why was there a vote? Since the economic recession of 2008 and the crisis in Greece, the UK people have questioned the benefits of remaining in the EU particularly when the UK economy remained relatively robust.   Record levels of EU immigration into the UK and increasing EU regulation were also factors for the growing anti-EU sentiment.  What were seen as anti-European parties enjoyed a rise in popularity in the UK in 2012 and backbenchers demanded that the then Prime Minister David Cameron announce an EU referendum to help fend off the anti-EU challenge.  In 2013, Mr Cameron said that he would hold a referendum on EU membership if the Conservative party won the 2015 election.  Which they did and here we are.  What was the UK Government’s position at the time of the vote? Before the referendum vote, Mr Cameron voiced support of the UK remaining in the EU by saying “The choice is in your hands but my recommendation is clear: I believe Britain will be safer, stronger and better off in a reformed Europe”.   The UK voted to leave and Mr Cameron resigned and was replaced by the now Prime Minister Theresa May.  Theresa May was against Brexit during the referendum campaign but now says it’s what the British people want. Why call a snap election? What might have come as a surprise to most, Theresa May called an election for 8 June last year.  She reportedly felt that the opposition parties would try to block her Brexit strategy and wanted to show a united front. However, the result of the election didn’t go to plan. The vote failed to give the Conservatives an overall majority in parliament so Theresa May went into government with Northern Ireland’s Democratic Unionist Party.  What’s been happening in the Brexit talks? Brexit talks started in Brussels on 19 June 2017 and there have been several rounds of negotiations so far.  Teams from the EU and the UK meet for around one week at a time.  The timetable for the talks has two phases.  The aim of phase one was to reach agreement on the rights of citizens, the financial settlement the UK will need to pay on leaving the EU as well as the border in Northern Ireland. While it was hoped last October that the talks could move onto phase two where the future trade relationship would be discussed, this was delayed until December where some progress was reported.  At the moment, talks continue but have not moved on to the future trade relationship (phase two).  The UK have agreed that a hard border must be avoided on the island of Ireland but have not put forward clear enough proposals as to how this would occur. Discussions are also taking place on the transition period which is a grace period for businesses and people to transition to Brexit.  This is conditional on a Brexit treaty being signed however. So if no deal is reached, there will be no transition period. The EU wants to reach an agreement on trade by October 2018 which will give six months to legislate for this agreement. All eyes are on Brussels as the clock ticks.  

Jul 03, 2018