How is the EU Exit deal affecting Family Businesses?

 Consider these points:

• EU Exit planning is going to take years to unwind and get into place, you can’t fully understand all of the changes and knock-on effects now
• There are reliefs in place to allow you to get paperwork, processes, and systems in order, you still have time, but you need to be proactive
• Don’t underestimate your questions, there are lots of interdependencies that all need to be unpicked to understand the bigger picture
• Think holistically to get the right answer rather than focussing on one contract or scenario that is relevant right now
• Using a simple framework can help you to ensure that you have covered all dimensions

Import and export

When importing from the EU, what considerations need to be made?

For companies in the UK exporting to the EU, this trade is only duty-free if those goods are of UK origin. Equally, if a company in the EU is exporting to the UK then that trade is only duty-free if the goods are of EU origin. If you cannot meet the country of origin requirements, then customs duty will now be payable. Customs duty is a ‘sticking tax’ which means it cannot be reclaimed so it represents an additional cost to the business. Which party is responsible for paying the Customs duty is determined by the Incoterms and which party is the ‘importer of record’.

Now that movements of goods between the UK and EU are imports and exports, rather than intra-EU acquisitions and despatches, the VAT accounting has also changed – this means that businesses need to either pay the import VAT at the point goods enter the UK, which will create an adverse cash-flow position, or ensure they complete a customs declaration to use Postponed Import VAT accounting. Again, the party who is responsible for paying the import VAT will be determined by the Incoterms and which party is the ‘importer of record’.

What do family businesses need to consider when shipping back out to EU based customers?

In addition to the points raised above, when exporting to the EU, companies will also need to consider whether there are any other obligations arising in the EU, such as a need for local VAT registration or fiscal representation.

In terms of local VAT registrations, the simplest starting point is to consider, are you trying to move goods into an EU country and then transfer title to your customer in that EU country? If so, you may need a VAT registration in that EU country in order to recover VAT due on import and account for domestic VAT on your sale within that country.

Some EU countries require fiscal representation. This is an agent who will be responsible for calculating and reporting local VAT due and will typically be jointly liable for the amounts. HMRC do not require non-UK businesses to have a UK fiscal rep in order to import goods into the UK - the picture across the EU is mixed, so it’s necessary to check on a country by country basis. For example, in France, there is no requirement, whereas in Austria a fiscal representation is required but does not need to take on the liability. So fiscal representation requirements need to be discussed with local advisors when applying for local VAT registration.

At the moment, a key loss faced by UK businesses exporting to the EU is the distance selling thresholds, which prior to 1 January enabled UK businesses to make B2C sales into the EU without needing to register in the EU country of the customer and instead just apply UK VAT, until the sales reached a certain threshold set by each country. The loss of this has meant many UK businesses have had to obtain EU VAT registrations to continue trading (this assumes consignments are valued at EUR 22 or more as below this threshold there were exceptions). It’s positive to report that the One Stop Shop will come into effect from July.

Supply Chains

What impacts have there been on supply chains as a result of EU Exit?

One of the biggest challenges is the country of origin rules and the Customs duty which may now be payable if these rules cannot be met.

The previous free trade between the EU and UK meant that companies have built up complicated and high-velocity supply chains. It is very common for companies to use the UK as a distribution hub. Lots of companies bring in goods from the EU and then re-export to the EU - the Republic of Ireland in particular. Depending on the economic origin of those goods, this UK distribution hub model could mean a double duty hit. First, as they enter the UK and then again when they enter the EU. For example, one high profile case revolved around Percy Pigs sweets. The sweets are imported from Germany into the UK and then exported to the Republic of Ireland without any processing in the UK. As these goods cannot be claimed as UK origin, when they are exported to the Republic of Ireland they now incur Customs duty. As Customs duty is a ‘sticking tax’ it cannot be recovered and so this means an additional cost to the business.

As a result, companies are now having to unpick their supply chains, engage with their suppliers, understand the economic origin of the goods, and determine if customs duty will now be payable - all of which is important to ensure compliance. In addition, a key consideration is whether the supply chain and flow of goods still make business sense. For some companies, this may mean exploring other options to minimise these new costs.

Does setting up in Europe mitigate any risks?

It’s not a simple yes or no answer and the decision will depend on the specifics of your family business. Certainly for some, having operations in the EU will be advantageous and It could certainly mitigate some risks, but setting up in other countries comes at a cost. Before making any big decisions, it’s important to properly assess the impacts of the EU Exit on your family business from a strategic, operational and financial perspective.

What should family businesses be doing to adapt to the post-EU Exit world?

1. Take time to review the country of origin of your supplies and products as that will determine if customs duty is payable.
2. Review your contractual terms with customers and suppliers and determine which party is the importer of record. This party will be responsible for paying customs duty and the import VAT.
3. Engage with agents and third-party logistics providers to ensure they’re aware of your specific needs and that you have the correct paperwork in place. This will help minimise delays at borders.
4. Assess the financial impact of the EU Exit on your business and determine whether your existing flow of goods still makes business sense. While EU Exit may result in increased costs, many businesses will be able to absorb them or pass them on through changes to pricing. Where this cannot be done, it may be beneficial to make changes to your business model and for some businesses, this may mean setting up operations in the EU. 
5. And of course, with change comes opportunity – By performing a holistic review of your business it will help you to identify these opportunities and plan on how to act on them.