It has been almost two months since Brexit finally took effect and there was much relief when a deal was reached at the last minute between the United Kingdom and the European Union. Nowhere was the breakthrough more anticipated than in Ireland as nearest neighbour to the UK and sharing the border with Northern Ireland.
From the time the Brexit referendum was decided in 2016, it was clear that the industries most impacted by Brexit were going to be those which relied upon the integrated EU regulatory authorisation regimes which apply to financial and insurance services and businesses reliant on physical supply chains to which customs duties and, perhaps more importantly, customs formalities would apply.
The deal reached, the EU-UK Trade and Co-operation Agreement (TACA), lays down the terms of the future trading relationship. Separately, the Irish Government have also implemented certain changes which mitigate some of the foreseeable challenges to business as a result of the UK’s exit from the EU.
In the first two months there have been a number of trends which have emerged from an Irish customs and VAT perspective. Businesses have had to consider and cope with many changes, some of which were anticipated and others which were not - thereby posing challenges which require consideration and the application of potential solutions.
VAT changes for financial and insurance providers
It has been well publicised that crucial issues relating to financial services were not addressed as part of TACA and uncertainty remains at the time of writing on how some of these issues are going to be resolved (if at all). Passporting arrangements and equivalence determinations remain open issues. Contingency plans put in place by financial services firms to ensure continued, unrestricted access to the EU markets through the establishment of new legal entities in the relevant jurisdictions, including Ireland, have proven to be a prudent course of action from a regulatory perspective.
The establishment of new legal entities, in an effort to comply with regulatory requirements, has resulted in more outsourcing arrangements (including intra-group arrangements) being put in place. These outsourcing arrangements require careful consideration to ensure irrecoverable VAT costs do not arise. Previously this was not an issue if entities had the resources themselves to carry out activities with a lower level of outsourcing required. VAT costs associated with outsourcing have long been acknowledged as an area lacking certainty for the financial services industry and Brexit has only brought this into sharper focus with an increase in the level of outsourcing arrangements required to allow newly established entities to operate. However, with careful consideration, it has proven possible to mitigate against potential increased VAT costs.
The VAT impact on businesses in these industries has not all been negative. Some have found they are entitled to recover previously irrecoverable VAT where they continue to provide financial services to customers in the UK from Ireland (in circumstances where this is still permitted from a regulatory perspective). This increase in VAT recovery entitlement arises from the fact that financial services supplied to customers in the UK, as non-EU customers, can now give rise to an entitlement to recover VAT, which is not the case where similar services are provided to EU based customers.
Benefits of TACA only go so far
After just a few weeks, the most significant impact from a tax perspective has been on physical supply chains and the movement of goods cross-border. Whilst the application of customs formalities and indirect taxes to cross-border movements had become a relatively distant memory, particularly between the UK and Ireland, the reimposition of customs on goods moving between the UK and Ireland since the beginning of the year has triggered a steep learning curve for many and some unexpected new challenges.
Much of the commentary in the lead up to the conclusion of TACA, whilst not presenting TACA as a panacea, perhaps did not prepare those impacted with a clear picture of the real world impact. Furthermore, the late finalisation of TACA did not provide many with the necessary time to review and consider its impacts on their existing arrangements, even if they were confident that they had prepared adequately. However, now that TACA has come into effect, the impact is being encountered in real time with solutions also being developed in tandem to meet the increasing level of shipments.
Increase in paperwork
Most businesses were aware that they (or their freight operators) would need to be in a position to complete the relevant paperwork for the import and export of goods. Significant efforts were made in Ireland to promote awareness of this issue by the Government and the Irish Revenue Commissioners. The Irish Revenue Commissioners have also been making investments to ensure the relevant paperwork can be processed in as timely a manner as possible.
Whilst there have been some well publicised challenges, given the steep increase in the number of declarations being made, efforts continue to ensure there is a smooth increase in the capacity of the systems to cope and for businesses to comply with their obligations. Putting aside the anticipated practical challenges which have arisen, certain nuances in TACA and the goods which can benefit from it have had an unexpected impact on certain supply chains including those involving Ireland.
When EU goods are not EU goods
A much vaunted benefit of TACA is duty free access to the respective markets of the UK and the EU for movements of goods. Importantly, however, the movement of goods between the UK and the EU will only qualify for customs duty free treatment provided the goods in question ‘originate’ in the jurisdiction of export, pursuant to the rules of origin in TACA. The rules of origin are detailed rules which determine whether goods qualify as EU or UK origin for the purposes of TACA and require a detailed analysis for suppliers and customers to confirm that is the case. This was an anticipated burden for businesses.
If origin has been confirmed, TACA provides that EU originating goods may be imported into the UK free of customs duty and, vice versa, UK originating goods may be imported into the EU free of customs duty. However, TACA does not relieve the importation of goods which were originally shipped from the EU to the UK but are subsequently sold back into the EU. This is a not uncommon arrangement in the Irish market, and UK suppliers often fulfil orders for Irish customers, even though the products are sourced from elsewhere in the EU. In short, EU originating goods which are exported to the UK cannot be imported back into the EU free of customs duty under the terms of TACA. This has caught many businesses by surprise.
To illustrate how these rules apply in practice, consider a trader with a supply chain involving EU-originating goods exported from France (e.g. a widget manufactured in France) to a UK distributor’s warehouse for subsequent onward delivery to customers in the UK and Ireland. If the widgets are supplied to an Irish customer and shipped from the UK warehouse, that will constitute an importation in Ireland and will not qualify for tariff-free treatment under TACA. The widget will not be deemed to ‘originate’ in the country of export, i.e., the UK. Instead, customs duty will apply to its import into Ireland from the UK (in the absence of any relieving procedure).
Given what many see as a surprising result, it has been necessary to consider what actions can be taken to mitigate the imposition of customs duties.
First of all, in some instances the products themselves may qualify for a relatively low level of customs duties, even outside the remit of TACA. If this is the case, businesses in some cases will decide to absorb the cost or, in other instances, pass it onto the end consumer by way of a price increase.
Alternatively, the goods may be directly shipped from the EU to Ireland. This may involve direct shipment by air or sea (indeed, there has been a marked increase in the past months in the direct shipping capacity between Ireland and the continent which has been in strong demand). It is also possible for goods to be directly shipped using the UK land-bridge to Ireland with appropriate transit procedures being followed. This is certainly a solution which is being implemented successfully by many businesses. However, it does not address those goods which are currently fulfilled from UK warehouses where these alternative supply chains are not cost effective and not practical in the short term.
Alternative potential solutions have emerged to address this. Returned goods relief under the EU customs regime allows for the re-importation of goods into the EU without payment of customs duty if the same goods have been originally exported from the EU. Certain conditions and documentary requirements have to be met to avail of this relief at the time of re-importation (which must take place within three years of the date of original export from the EU). In some instances, this may prove worthwhile where material amounts of customs duty would otherwise fall due. This relief was perhaps not intended to be relied upon on a regular basis as a fixed part of supply chains, but it may become an important tool for businesses given the currently highly integrated nature of distribution networks in the UK and Ireland.
As an alternative to returned goods relief, some businesses are also considering the application of EU internal transit procedures combined with the use of UK customs warehousing to facilitate goods being stored in the UK pending delivery to Ireland and thus preserving the EU status of the goods. It is not yet clear how practical this will prove, given it is often the case that the large majority of goods brought to the UK from EU suppliers are intended for the UK market rather than the Irish or EU market. Implementing these arrangements will likely require careful consideration and perhaps segregation of those goods potentially intended for the EU market, rather than the UK market.
A VAT silver lining for Irish importers
A positive consequence of Brexit for Irish importers is the introduction of postponed accounting for import VAT to address concerns of the cash flow impact for many Irish businesses sourcing goods from the UK. This system allows Irish importers to account for VAT on the importation of goods from all non-EU countries (including the UK) when filing their VAT return for the period. This allows Irish importers to simultaneously offset the VAT liability against their entitlement to recover the VAT. This contrasts with the previous system whereby VAT was, by default, paid at the time of importation and subsequently refunded by the Irish Revenue Commissioners giving rise to a temporary cash-flow cost. Irish industry identified early on in the Brexit lifecycle that this would likely be unsustainable for many Irish businesses which trade with the UK and had not suffered this cash flow cost before. However, the introduction of the postponed accounting regime has also benefitted those businesses which were already importing goods from outside the EU and would have historically been incurring a cash-flow cost. Given the broad manner in which postponed accounting has been made available to importers in Ireland, it is anticipated that it will be closely monitored by the Irish Revenue Commissioners, and more conditions may be imposed once businesses have become familiar with the day to day importation of goods.
In summary, many businesses are expected to be impacted by Brexit. Preparation in the lead up to 1 January 2021 was essential and many challenges were anticipated and solutions publicised including by the Irish Government and the Irish Revenue Commissioners. It is also clear that continued adjustment and business planning will remain necessary to address some of those issues mentioned above and, indeed, any other challenges and opportunities which emerge as the dust settles on the first months of Brexit and the implementation of TACA.
This article was originally published on ifcreview.com on Thursday 25 February