As the dust settles after the June 23 Brexit vote, there has been a lot of talk about the political implications. However, manufacturers need to be thinking about the practical implications, particularly those that will likely result from changes to the Value Added Tax (VAT) system and other trade regulations in the U.K. and EU.
While the U.K. has at least two years to negotiate its withdrawal agreement, the resulting tax changes could be significant. Companies operating in the U.K. and other parts of Europe should begin to plan for the future. Once the U.K.’s withdrawal from the EU is complete, the country will no longer be bound by the provisions of the EU VAT Directive, and VAT rules on transactions between the U.K. and the EU will become more complex.
Brexit essentially reinstates the borders between the U.K. and EU Member States. Theoretically, within the EU, VAT is harmonized across countries, allowing businesses to ship goods freely between member countries — making it easy for manufacturers to maintain multi-country supply chains. However, the U.K.’s decision to leave the EU means these simplifications will no longer apply when the U.K. is involved in trade. As a result, manufacturers could be faced with more complexity and increased costs.
How Could Brexit Affect Manufacturers?
Cross-Border Trade
As a result of Brexit, U.K. companies will likely run into a variety of issues when trading with the EU, including fiscal representation, import formalities and other complex VAT administrative burdens on their cross-border sales to private consumers.
Businesses conducting cross-border trade between the U.K. and EU could experience new and potentially more complex requirements, reflecting the transition to an import/export system as U.K. suppliers will be treated like any other non-EU supplier. Long gone will be the days of shipping goods between the U.K. and EU duty-free. Brexit could add up to a 17 percent duty on the trade of goods between the U.K. and EU, as those goods will be considered imports/exports instead of intra-community supplies. In addition, a company’s ability to defer VAT payments could disappear, eliminating substantial cash flow benefits that exist in the current EU VAT regime.
Another tax benefit U.K. companies will lose relates to “distance selling.” This process happens when goods are sold by a business in one EU Member Country to private consumers in another EU Member Country (B2C). If sales of this type are below a certain monetary threshold, the seller can charge and remit VAT in the country where the goods were shipped from instead of the destination country. From a compliance perspective, this is generally easier as businesses don’t have to research another country’s tax rules, and register and remit VAT there.
Complications to Supply Chains
Companies engaging in triangular transactions involving the U.K. may also face new registration, calculation and reporting requirements.
One critical change for manufacturers is that the EU VAT Directive’s simplification scheme (“triangulation simplification”) will no longer apply when a U.K. entity is involved in the supply chain. Triangulation simplification currently allows companies to conduct certain three-party, three-country transactions without incurring multiple registration obligations. Without this simplification scheme, the middle party in these transactions will likely need to register in the final country of supply and self-assess VAT there.
For example, after Brexit, a U.K. middleman arranging a shipment of goods between a Spanish manufacturer and a French retailer will technically be making an intra-Community acquisition of goods in France, and will have to register and self-assess VAT there. This additional compliance burden could increase the cost of doing business for everyone in the supply chain.
This change represents a significant compliance burden for manufacturers involved in multinational supply chains where any part of the chain is in the U.K., and will likely cause companies outside of the U.K. to seriously weigh the value of their U.K. relationships against other potential business partners still in the EU.
Business-to-Government Compliance Reporting
After Brexit, companies shipping to and from the U.K. will need to adjust their VAT reporting processes to treat transactions between the EU and U.K. as imports/exports rather than intra-community supplies. Additionally, manufacturers can expect new compliance obligations in the form of import duty and import declarations. Such new reporting requirements are likely to require fundamental changes to internal business processes and systems that take substantial time and resources to implement.
How Can Manufacturers Prepare for Brexit?
Over the next two years, more information will come to light about the economic implications of Brexit. In the meantime, there are a few ways manufacturers can start preparing:
- Evaluate the situation: Every company will be affected differently by Brexit. It’s never too early to start to understand the risk your company faces.
- Review core systems: VAT is one of the most complicated business-to-government compliance processes, and most systems aren’t built to support changes to this process. Multi-national companies will need to review the efficacy of ERP-based solutions and VAT filing processes to make sure those tools are adequate in a new, more complex tax environment. Specifically, most manufacturers will face the difficult task of reconfiguring their internal systems, such as SAP, to treat the U.K. as a country outside the EU. This will likely involve significant reconfiguration of ERP VAT codes for transactions between the U.K. and EU, for transactions between the U.K. and non-EU countries, and for transactions involving supply chains where any part of the chain is in the U.K.
- Build a comprehensive business-to-government compliance strategy: Brexit is only one of a number of significant changes in business-to-government compliance being considered and implemented across the globe.
If nothing else, the Brexit vote shows how volatile and challenging today’s global business economy has become. While the specific ramifications remain to be seen, it’s no doubt that multinational companies are in for a turbulent ride. Proactive companies will see Brexit as an opportunity to re-evaluate their compliance procedures and develop change management processes to continually manage today’s complex environment.
Andy Hovancik is president and chief executive officer at Sovos Compliance.