The European Union has published a technical note warning of dire consequences for businesses if the UK leaves the EU with no deal in place.

Takeaways

• The European Commission has warned companies across Europe to prepare for significant border friction and costs after the UK leaves the EU.
• Affected businesses should plan for the worst eventualities, whilst maintaining a watching brief as negotiations continue.

Britain will face unavoidable trade barriers if it decides to leave the European Union’s customs union

— Michel Barnier, the EU’s chief negotiator

Customs
Should the UK leave the customs union without another agreement in place, goods exported between the UK and the EU customs territory will be subject to customs supervision, and potentially controls, at the border. Under the Union Customs Code, customs formalities will apply, customs declarations will need to be lodged, and guarantees (e.g. customs bonds) may have to be paid. Goods imported from the United Kingdom will be subject to customs duties under the Common Customs Tariff.

In addition, goods exported between the UK and the customs territory will be subject to export controls (e.g. dual use and military goods, chemicals, waste products). Freight, logistics and other firms whose Authorized Economic Operators (AEO) status was granted by Her Majesty’s Revenue & Customs (HMRC) will find that it ceases to have effect within the EU unless the UK can negotiate mutual recognition. And, finally, goods originating in the United Kingdom which are incorporated into goods exported from the EU to third countries will no longer qualify as “EU content” under the EU’s Common Commercial Policy, which may affect the applicability of preferential tariffs set out in trade agreement between the EU and those countries.

In response to the looming possibility of a “hard” Brexit, Ireland’s state-owned Dublin Port Company, the country’s largest sea terminal, has built new customs booths and freight inspection points to handle border checks on UK imports. Whilst, the December joint report reflected agreement reached between the parties to avoid controls on the land border, it did not cover the sea border. Although the UK government’s white paper on future customs arrangements calls for a “deep and special partnership” with the EU, it is not clear where the UK is with equivalent contingency measures in the event that such a partnership cannot be agreed. Although HMRC has indicated that it will have updated its systems in time, it is also still stating that it will need considerably more staff to be able to deal with the increase in import/export controls.

Indirect Taxation (VAT and Excise Duties)
If no agreement is reached, goods exported from the UK to the EU VAT area will be subject to VAT at the point of importation (i.e. import VAT will be payable upfront at the border, whereas exports are exempt from VAT). The same is true for the application of excise duties.

This will be a significant change from current practice and could well cause cash-flow problems.

UK suppliers of telecommunications services, broadcasting services or electronic services wishing to take advantage of the Mini One-Stop Shop (MOSS) tax scheme will have to register with the tax authority in at least one EU member state. Also, British importers would no longer be able to claim VAT refunds electronically but instead will be subject to a different refund regime for taxable persons established in non-EU countries; and UK companies operating in the EU may be required to employ a representative to handle VAT payments in the EU.

Comments and Concerns

• Small Businesses
  A substantial majority of small businesses exporting goods from the UK do so only to the EU and so have not had to deal with customs and VAT in respect of their exports. If no customs union agreement is reached, they will have to start dealing with the impact of customs duties and VAT on sales to EU customers, including implementing compliance processes to ensure that the correct duties are paid. This obligation could impact up to 130,000 firms within the UK.

• Norwegian Model
  The EU recently signed a VAT co-operation agreement with Norway. The agreement “will provide the EU Member States and Norway with a solid legal framework for a sound cooperation to combat VAT fraud and assist each other in the recovery of VAT claims.” Even though Norway is in the EU single market and has a “similar VAT system” to the EU, the agreement took several years to finalise, with the negotiation process launched in June 2015.

• The UK’s View
  Although the UK Treasury declined to comment, UK Brexit secretary David Davis has previously described such “unilateral statements” from the Commission about “no deal” scenarios as “unhelpful” and “damaging” to UK interests.

• Customs Bill
  The Government has introduced the Taxation (Cross-border Trade) Bill (a/k/a the Customs Bill). Alongside the Trade Bill, the Customs Bill will “set the groundwork for the UK to become an independent global trading nation.” The Customs Bill does not presuppose any particular outcome from the UK’s negotiations with the EU; rather it provides the framework to give effect to the final agreement reached, including permitting the UK’s VAT and excise regimes to continue to function whatever the outcome of the negotiations.

Clarity Needed
The final VAT rules for cross-border transactions will depend on the outcome of Brexit negotiations. As those negotiations proceed, the Commission appears to be seeking to use technical notes such as this to increase pressure on the UK government, albeit in the name of transparency.