One of the big changes arising from Brexit is that anyone trading in goods into or out of NI will need to have some familiarity with import and export rules.
This is especially the case for trade in goods from GB to NI, which will affect a huge number of businesses here. I have looked at this in August’s post, and again in last month’s post. I will have to revisit the topic again, no doubt, as the mists slowly clear, but it will probably be by way of shorter more targeted commentary.
This month’s blog post focuses on trade with “third countries” (that is, with countries outside the EU). It covers where we are today and where we are likely to be with effect from 1 January 2021. Mercifully, this is one area where things are relatively stable…
I also cover, in outline, some of the key issues to do with customs (as opposed to VAT). Given the changes to GB/NI trade, these will have a relevance there as well, I suspect, and I have focused on the practical implications for NI traders after 1 January. This will mean change.
The customs sections cover the “Three Pillars of Customs” (not Wisdom), as well as a quick look at Incoterms.
Finally, I look at the VAT rules for exports, and comment briefly on the customs points too.
As usual, a quick summary of the main points then follows.
Just like last month’s post, I’ve used a number of examples about an NI company imaginatively called TradeCo Ltd, and mixed them in throughout what follows.
How Do I Handle Import VAT?
Imports are movements of goods from outside the customs territory into the UK or EU (in NI, from 1 January 2021, we will be in both customs territories, somehow). For the purposes of this Update, any non-commercial movements of goods are ignored. Note that when goods enter the customs territory of the UK/EU, this is described as entering “free circulation”, since they have then left the control of the customs authorities.
Lions Led By Donkeys?
Before you do anything else with an import, you have to have an EORI number. That’s not a sad donkey out of Winnie the Pooh, though you probably won’t be feeling very “tiggerish” either…
An EORI number is an “Economic Operator Registration and Identification” number.
For EORI numbers issued in the UK, they start with “GB”. However, for traders operating under the NI Protocol (basically anyone bringing goods into or out of NI), an “XI” EORI number will be required.
Anyone signed up to the TSS will (eventually) be issued with an XI EORI number, and HMRC have indicated that they will automatically issue an XI EORI number to every NI business they believe needs one. In practice, I suspect most NI businesses will end up with one, though there is some suggestion that purely “service” businesses will not necessarily receive one automatically. Given that even those businesses are bound to be buying some items from GB from time to time, I’m not sure that’s right. We are all likely to need one eventually.
EORI numbers are not difficult to apply for, although the turnaround time seems to have gone up this year. It used to take a couple of days, and now can take up to a week or two. More of that fabled efficiency in the UK public sector…! I’ve included a link to the relevant website at the end of the Update.
How Import VAT Works
Once you have your shiny new EORI number, what’s next?
The holder of the EORI number recorded on the import documentation will be issued with a C79 form, which must be retained as evidence for an import VAT reclaim. Import VAT is reclaimed on the UK VAT return in the same way as input tax. Note that HMRC will only generally issue C79s to holders of UK EORI numbers.
Up until the end of 2020, import VAT is chargeable and payable upfront. After 1 January 2021, most businesses will be able to use “postponed” VAT accounting, meaning that any import VAT may be reclaimed on their VAT return at the same time as they pay it over to HMRC. For businesses which can recover all of their input VAT, this will mean it’s a net “nil” transaction.
Note that where businesses avail of “delayed” or simplified customs formalities between January and July 2021 (this is not discussed in detail here), postponed VAT accounting is mandatory. In practice, it is difficult to see any rationale for not applying postponed import VAT accounting even where it is not mandatory.
There are some cases where import VAT will still need to be paid upfront, but for VAT-registered businesses these are likely to be very rare occurrences.
VAT is charged at the same rate as if the supply were a domestic UK supply. Indeed, HMRC are saying that GB to NI movements will be treated as domestic supplies – even though the EU disagrees… I return to this gem below.
VAT is charged in addition to any customs or excise duties which may be due on the supply, and is calculated on the duties-inclusive value of the supply.
What About Administration?
Generally speaking, import administrative procedures are complex and strictly applied. These are discussed briefly below. They will become a live issue for NI traders buying from GB with effect from 1 January 2021…
However, it is also worth noting that the import procedures can be delayed or avoided where you use a “customs warehouse”.
These require certain very strict accounting, legal and/or physical requirements. In effect, the goods can be held on UK (or EU/NI) soil but not be recorded as an import to the relevant customs territory.
I do not propose to discuss customs warehouses in detail. It is sufficient to know they exist and to know that certain operators (e.g.: carriers/freight forwarders such as DHL, DPD, etc) offer them for a fee. They can be used to hold goods prior to onward movement or for processing. They can also be quite flexible, but always require very close scrutiny from HMRC.
As well as customs warehouses, there are also certain reliefs and simplifications for the import rules when certain conditions are met. These are discussed briefly below.
There are provisions for such matters as the time of importation which vary slightly depending on the mode of transport. In practice, it is not usually difficult to establish the time of importation.
Note, however, that if goods are supplied between the time of their arrival in the UK and the time when an import entry is delivered to HMRC, the supply can be zero-rated provided the purchaser is, by arrangement, required to make the import entry.
I’m not going to discuss the detailed procedures for imports at length. Essentially, the importer (or its nominated agent) must provide HMRC with a SAD (also known as Form C88) which details the various customs codes, quantities, value, etc, in respect of the goods being imported. Typically, the carrier must also submit a “safety” declaration in addition to the SAD.
These forms must generally be submitted in advance of the movement of the goods, to permit smooth trade. The free Trader Support Service (“TSS”) is supposed to assist with this, although in practice it is beginning to look as though it will simply act as a kind of free customs software. On this basis it is strongly recommended both to sign up for the TSS and to liaise with GB suppliers and the carriers to sort out the formalities after 1 January 2021. Some GB suppliers are going to need an XI EORI number, especially where they act as the importer.
Once HMRC are satisfied that all the relevant checks have been made and charges accounted for, the goods will be released into “free circulation”.
The question of the deferment of customs duties is discussed in greater detail below. Before looking at that, a short example of a simple import scenario is given below:
- Example 1: From Russia With Love
TradeCo Ltd is an NI company which is registered for VAT. It has ordered some steel from Russia (which is outside the EU). When the steel arrives at the port in Belfast in January 2021, HMRC carry out their normal customs checks. TradeCo Ltd has an EORI number, which is quoted on the Form C88.
The import VAT on the steel is calculated as 20% of the total customs value of the steel, namely, £200,000. There are also Customs Duties (“CDs”) at 5% of the customs value [note this is a fictional figure – the real CD rate should be checked at the date of import].
TradeCo Ltd pays over the CDs in full, and the goods are released into “free circulation”.
As all of the necessary paperwork is in order, HMRC issue a Form C79 to TradeCo Ltd. This C79 is sent out to TradeCo Ltd by post in the following month.
TradeCo Ltd then accounts for and simultaneously reclaims £200,000 of import VAT on its next VAT return.
Note one very important point, hinted at above. For GB to NI sales, the customs formalities will be broadly as stated.
However, the VAT treatment will be different.
HMRC issued a Policy Paper, which I discussed in last month’s Update, on 26 October 2020. They have since updated it, although without actually clarifying a number of the points we are all still wondering about…
However, to make things as simple and as clear as possible, I have adjusted the above example to make the supplier a GB business, rather than Russian.
Note that this example is designed to illustrate what happens with a “normal” transaction between two businesses, one in GB and one in NI. There are other issues which I’m not covering here!
- Example 2: I Must Go Down To The (Irish) Sea Again…
TradeCo Ltd buys some jam jars from an English supplier, Dodgers Ltd, based in Carlisle. The jam jars are sold under EXW (see the Incoterms section below), so TradeCo Ltd arranges for collection of the jars in Carlisle and has them brought to Stranraer for shipping to Belfast.
TradeCo Ltd has hired an international carrier firm, MoveIt plc, to handle the formalities. Costs are higher than in 2020, but MoveIt plc have assured TradeCo Ltd that, with an XI EORI number and the various consignment details provided (including commodity code, etc), they will be able to handle everything.
MoveIt plc completes the import formalities online before shipping the jars to Belfast. Thanks to the amazing, world-beating FTA signed by Boris Johnson and the EU, there are no tariffs, so it is a purely administrative matter.
TradeCo Ltd has received a VAT invoice from Dodgers Ltd, and suffers the full 20% VAT cost at the time it pays its bill. It then reclaims the VAT on its VAT return as normal. No C79 was issued by HMRC in this case, because the supply is treated as a domestic supply for VAT purposes (though not for customs purposes).
The directors of TradeCo Ltd try not to think too much about it… and are glad MoveIt plc were able to help them. Let’s hope that MoveIt plc didn’t make any mistakes on the forms!
If you have any questions about VAT and the customs formalities coming in from 1 January 2021, please don’t hesitate to get in touch on 02871 876 220, or at firstname.lastname@example.org.
Reliefs from Import VAT & Customs Special Procedures
There are numerous reliefs from import VAT, but the vast majority of them are of very limited application in practice – for example, they affect members of the Armed Forces, or certain kinds of personal property, such as medals, etc.
There are also “customs special procedures”, including a “Temporary Admissions” relief which applies to very specific categories of goods, and which effectively suspends collection of import VAT until the goods enter “free circulation”.
In this post I’ve addressed two of the more common procedures, namely, Inward Processing Relief and Onward Supply Relief. I also take a very quick look at Transit, which is likely to be very important for goods moving between NI, the ROI and GB (in some combination of movements)
- Inward Processing Relief (IP)
IP is designed to promote exports from the EU in certain sectors which do not threaten “essential interests” of the EU. Duty is relieved on non-EU goods which are imported for processing prior to re-export outside the EU.
IP drawback requires import VAT to be paid at the time of import, and subsequently reclaimed.
However, IP suspension allows import VAT to be suspended. It only becomes chargeable if the goods are subsequently diverted to free circulation.
- Onward Supply Relief (OSR)
Goods which are held under IP, TA or in a customs warehousing regime, and which are imported in the course of an onward supply to a taxable person in another EU member state may be put into free circulation in the UK without payment of import VAT.
Instead, VAT is accounted for on the supply or acquisition by the purchaser in the EU member state of destination.
Goods which enter under IP for processing and supply to a customer in another EU member state may claim OSR once the imported goods enter free circulation in the UK and are then dispatched to the other EU member state.
The EU Commission gives a very good summary of transit, as follows:
“Customs transit is a customs procedure used to move goods:
- between two points of a customs territory, via another customs territory; or
- between two or more different customs territories.
Using the Customs Transit procedure allows for the temporary suspension of duties, taxes and commercial policy measures that are applicable at import. As such, it allows customs clearance formalities to take place at the point of destination rather than at the point of entry into the customs territory.
Customs transit is particularly relevant where a single customs territory is combined with multiple fiscal territories: it allows the movement of goods under transit from their point of entry into the Union to their point of clearance, where both the customs and national fiscal obligations will then be taken care of.
Transit (broadly) falls into two types for our purposes. Within the EU (which will include NI after 1 January 2021, but not GB) it will be T1 transit procedures. Where the goods go via GB, the transit procedures will be T2.
Transit requires an authorised consignor (sender) and an authorised consignee (recipient). Both parties must be registered and authorised to use transit. This requires a comprehensive guarantee to cover the notional loss to the customs authorities in the relevant jurisdictions.
Authorised premises are also required at both ends, and this will typically be a customs warehouse (see above).
The goods are subject to a customs seal between both points, and a TAD (“Transit Authorisation Document”) is also required as evidence of approval.”
It is easy to see plenty of situations where this could be quite valuable. It is also easy to see that this is quite an undertaking to arrange yourself. For this reason, it is likely to be the big carriers/freight forwarders which arrange this kind of procedure on behalf of Buyers and Sellers.
If you have any questions about special procedures for VAT and customs, please don’t hesitate to get in touch on 028 71 876 220 or email@example.com.
Abating The Agony: Import VAT and Customs Duty Deferment
Unless the importer or its agent have successfully applied for deferment, import VAT is currently due at the date of entry to the UK. After 1 January 2021, deferment is less likely to be of interest for import VAT, owing to the use of postponed accounting.
Where there are no tariffs – as will hopefully be the case for GB to NI trade – then the commercial rationale for a deferment account largely drops away.
Deferment applies to both customs duties and import VAT. This is purely an outline treatment of the issue, and if you have any queries, please just get in touch.
Deferment must be approved by HMRC and the importer (or its agent) must hold a “Deferment Approval Number” (DAN).
Deferment works by totalling all the charges (except excise duties, which are not discussed here) in a given calendar month, and then requiring payment of the total sum by the 15th of the following month.
Payment of the charges must be by BACS and failure to pay requires immediate settlement of the debt, and often leads to cancellation or suspension of the deferment account.
A guarantee of the amount of the charges due must be provided from an approved financial institution, up to a particular limit (the “deferment limit”). Any charges in excess of this limit must be met upfront. Guarantees can be adjusted from time to time.
An importer may use Simplified Import VAT Accounting (SIVA) to reduce the guarantee required in respect of the import VAT only (not the duties). SIVA can be applied for by taxpayers with a good compliance record for at least 3 years, 12 months international trade history and sufficient financial means to make up any shortfall.
As noted above, after 1 January 2021 postponed accounting will generally apply for import VAT anyway…
The Three Pillars Of Customs
Last month’s Update covered two main topics: EU trade, and the latest iteration of the GB-NI aspect of the NI Protocol.
EU trade is, from the perspective of NI trade, not really closely involved with customs, as we will (in theory…) continue to trade within the EU customs territory after 1 January 2021. As discussed last month, GB-NI trade is a different story, so what follows will definitely be of relevance there. Let’s hope the TSS makes it easy for us…
The Unholy Trinity?
Sadly, the Three Pillars of Customs are not as exciting as Lawrence of Arabia’s Seven Pillars of Wisdom, but given that we are talking about tax, that’s probably not a big shock…
As with any tax, Customs Duties (“CDs”) require some parameters to ensure that monies are levied when they are legally due, and it is the Three Pillars which provide most of these parameters.
Each Pillar is briefly discussed below. All of them are important to correctly filing customs documentation and to minimising the risks of any Customs audit.
Classification: Or What Exactly Is It You’re Moving About?
Classification is the first issue to determine before moving on to anything else.
Classification can be a vastly complex and detailed topic – there are people who specialise in this field on its own, and I am not one of them!
Briefly, classification is the process by which a particular good is allocated a particular code for customs purposes. It is done by following a logical series, from “heading” down to “subheading”, and so on, in the code for the relevant customs territory. There are international agreements on classification which help to simplify some of the processes involved.
In effect, the customs system in the EU (and, shortly, the UK) allocates a number of digits as a code for each product which is traded internationally. This code determines whether there are preferential tariffs or special rules for specific categories of goods when entered in the SAD.
Classification is covered by the Union Customs Code (“UCC”) in the EU, and for NI traders bringing goods into NI, this is the starting point. Details of the UCC classification may be found on the TARIC website (see link at the end of the Update).
Anyone using TARIC will see that the data input also requires a country of origin – which leads us nicely on to the next topic…
Origin: Where Does It Come From… Really?
Once again, origin can be a specialist topic all of its own.
Very broadly, goods which come from a specific country will have that country as their place of origin. If the goods are subject to substantial processing in another jurisdiction, then that can change the origin.
Matters can be complicated where goods incorporate parts or elements from a number of different countries, or where processing means changing the goods, but adding in other goods with a different origin.
This opens up questions such as: where are the goods from really? And how can we decide on this?
Origin matters because, under FTAs, origin is one of the crucial criteria for allocating “preferences”, whether in terms of tariffs or quantities permitted from a specific jurisdiction.Where origin carries benefits under an FTA, the rights under the FTA must be specifically claimed on the import/export declarations, and the origin must often be evidenced with a formal certificate of origin or similar document.
For businesses buying in directly from outside the EU/UK, origin will generally be well established at some point in the supply chain.
Where it will become a new issue, immediately from 1 January 2021, is with GB to NI trade. It has not been of any great interest up to now, but because an import declaration will be required in the new year, the origin of the goods will have to be determined.
Practically speaking, if the goods stay within NI or return to GB (in one form or another), then it is unlikely that origin will become a huge problem, since HMRC will be policing the system, and the goods will be remaining within the UK customs territory (while also leaving it… this is a very strange state of affairs!).
However, if the goods enter the EU, then origin could be very important, especially where an EU customer faced a Customs audit at some point in the future…
If in doubt, therefore, check it out! This will require speaking to suppliers and possibly customs experts as well…
Valuation: What Is It Worth?
The customs value is the basis for calculating CDs, when charged as a percentage of the value of the goods, and also for calculating import VAT. The basis for valuation is agreed internationally under the WTO rules.
Just like the other two Pillars, it is very easy to go down a rabbit-hole here.
Accordingly, I will keep it as brief and to the point as I can.
First, even though valuation is perhaps no more likely to be wrong than classification or origin, HMRC are likely to focus on this area when looking for mistakes because it’s easier to understand (for all parties), and therefore quicker and easier to raise revenue from. That is not to say that classification and origin errors will not be investigated! It’s just that they’re less likely to be the starting-point of any enquiries…
Secondly, the most common approach used is the “transaction value method”. I will not discuss the other methods used, as they are much rarer in practice (only ca. 5% of trade isn’t covered by the transaction value method). They will generally only appear where there is no price for the transaction, or where the price charged is so strange that Customs refuse to accept it. In a B2B situation, this is unlikely to crop up very often.
Thirdly, the transaction value must include the following key items – and any trader must be aware of these:
- Costs incurred by the BUYER not included in the price paid, such as commission, brokerage, costs of containers,
- Any goods or services provided by the Buyer free of charge or at a reduced price used for the production of the imported goods
- Royalties and licence fees related to the goods, when paid as a condition of sale of the goods
- Any proceeds of subsequent resale or disposal of the imported goods which accrue to the SELLER
- Costs of transport and related costs up to the point of entry into the customs territory
Fourthly, the following items should NOT be included in the customs value:
- Transport costs after the point of entry into the customs territory
- Interest charges
- Import duties and other taxes levied (that’s a relief!)
- Assembly or maintenance charges incurred after entry into the customs territory
- Buying commission
The basic idea is relatively simple: what did it cost to get the goods into the customs territory? Once they’re in, CDs are not in point: they’ve entered “free circulation”.
Anyone moving goods from GB to NI after 1 January will therefore need to be aware of valuation as an issue.
Where a carrier is used, it is to be hoped they will be able to assist with much of the calculation above and beyond the basic cost of the goods.
While CDs may (hopefully!) be avoided by an FTA between the UK and the EU, there are going to be some very interesting questions about valuation for VAT purposes for GB to NI goods movements. Answers are still, sadly, in very short supply…
What’s Involved In An Incoterm?
What is an Incoterm? What does it do? Why would you want to know?
Anyone with some experience of international trade will be familiar, at least to some extent, with Incoterms.
For the rest of us, it is another one of the many wonderful learning opportunities – another “teaching moment” – provided by Brexit and all it entails for NI…
Let’s Start At The Very Beginning…
The logical place to begin is with the problem Incoterms are designed to solve, and which is popping up in the Irish Sea with effect from 1 January 2021.
Any sale of goods carries with it a number of concerns which need to be addressed by the parties:
- Who is exposed to any risks of damage or loss?
- Who is liable to arrange or contract for carriage?
- Who has to pay any costs associated with the sale?
These three basic issues arise every time goods are moved from one person’s possession to another. These are typically dealt with in a sales contract which (hopefully) determines the questions, often by setting a clear point in time and space at which the Buyer takes over the risks, carriage and costs from the Seller.
The Incoterms are a set of handy “short-hand” agreed contractual terms which address these (and some other) issues, by reference to the point of “delivery”. This is the key place in the chain where problems are handed over from one party to the other. This is not the same as saying that title or ownership is handed over…!
Because of their handiness, the Incoterms are often used (sometimes unwittingly) for domestic trade as well. For example, many readers will be very familiar with the term “Ex Works”, typically as a means of determining the price. I will come back to this below.
However, international trade adds another big question to the ones mentioned above:
- Who has to handle import/export formalities and pay any associated CDs, etc?
This is the very heart of customs: filing a form and paying the taxes due.
Incoterms also address this issue, again by reference to the point of delivery.
Not Doe-Re-Mi, But EXW, FCA, all the way to DDP… And No Deer, Either
The Incoterms are developed and updated regularly by the International Chambers of Commerce. I’ve included a link to their website below. The Incoterms are available in a handy (small) book which costs about £45 on Amazon (where else?).
In the 2020 version of the Incoterms, there are 11 three-letter terms. Seven of them are for “any form of transport”, and four are “maritime” only. It is sensible (to say the least) to use an appropriate Incoterm for the kind of transport being used.
Many NI traders will, for obvious reasons, be bringing goods in on a ship. However, the ship is not always going to be the only link in the chain of carriage. Goods will need to be lifted from the Seller’s premises and be brought, ultimately, to the Buyer’s premises.
The 11 Incoterms 2020 are:
Any Form of Transport
The Incoterms stretch from placing all responsibility on the Buyer (EXW) to placing all responsibility on the Seller (DDP). The rest of them involve some mixture of responsibilities, with the “D” ones being more onerous for the Seller, and the “F” ones being more onerous for the Buyer. The “C” ones essentially split carriage from the transfer of risks.
For reasons of convenience, space, and the sanity of my readers, I will focus on three of these terms.
EXW is the simplest one from the perspective of the Seller. The goods are simply held at their premises until the Buyer collects them (either directly or by using a carrier). There is no obligation on the Seller to load the goods. This means that any damage incurred in the loading process falls on the Buyer, who has no recourse to the Seller. Horror stories can arise in these circumstances, so it is important to tread with care.
Large Buyers might be content to arrange collection, imposing an obligation on the carrier as to loading, from a smaller Seller’s premises. This means the Buyer is then responsible for the customs formalities, as well as everything else.
Where the Buyer is large, it is likely they have the resources and economies of scale to manage a situation such as this without great difficulty.
Where the two parties are relatively evenly matched, EXW might not be particularly attractive. Which brings me to the next Incoterm in the list.
Example 2 above sets out the basic pattern for an EXW transaction – in that case, TradeCo Ltd had to handle everything.
Under FCA (“free carrier”), the Seller is contractually obliged to ensure that the goods are safely loaded on the means of transport provided by the Buyer (whether directly or via a carrier), or are delivered and unloaded at a place at the “disposal” of the Buyer or its named carrier.
After that point, the Buyer is on the hook. Smaller Buyers might find it easier to pay the carrier to manage the customs formalities, albeit there will be a cost to this, and they will (of course) need an XI EORI number to allow the carrier to do this for movements from GB to NI.
Under FCA, Example 2 would be very similar, except that Dodgers Ltd would either have to load the goods into the transport provided by MoveIt plc (at TradeCo Ltd’s expense…); or drop the goods to an agreed location where MoveIt plc would then load them on to its transport. Either way, Dodgers Ltd would have a bit more to do, and TradeCo Ltd would have a bit more protection from risk than under EXW.
DDP means “delivered duty paid”, and (a bit unusually!) actually means what it says. Under DDP, the Seller must deliver goods having paid the duty.
In a reversal of the EXW scenario, a large Seller might agree to DDP for a sale on the basis that it was best placed to handle the customs formalities. Naturally, the Buyer’s price on a DDP basis will be higher than on an EXW basis. That does not mean, however, that it is not commercially sensible to pay the extra and have the hassle handled by somebody else… To adapt Example 2 above, let’s assume that the sale was done on a DDP basis:
- Example 3: …To The Lonely Sea And The Sky…
The facts are identical to those in Example 2 above, except this time, the sale is DDP. Now it is Dodgers Ltd’s problem to arrange carriage and handle the import formalities.
So Dodgers Ltd needs to obtain an XI EORI number since it will be acting as the importer in NI in this scenario. This holds things up a bit…!
Once the XI EORI number has been received, Dodgers Ltd then signs up MoveIt plc to handle the carriage.
On this occasion, everything goes smoothly again, and MoveIt plc successfully files the import declaration and the goods are delivered to TradeCo Ltd’s premises in Belfast safely.
Once again, the VAT is due just as if this was a normal domestic supply… At least that’s (fairly) straightforward…
TSS View Of Incoterms
It is worth stating what I heard on the TSS’s two-hour webinar about GB to NI trade. It is clear that their hope is that the “big boys” in transactions take on the risk and essentially charge the other party for doing so. The Government also clearly hopes that the big carriers (UPS, DPD, DHL, etc) will be able to facilitate matters, again for a fee.
A Drop Of Golden Sun?
It is easy to begin to despair with all of this.
However, two points should be made.
First, it seems entirely reasonable to suppose that the big carriers will indeed be able to assist with all of this. The issue then effectively becomes a matter for whichever party is on the hook under the Incoterms to negotiate a good price with its carrier.
Secondly, speaking early to suppliers to let them know this will come in and having a discussion about the kinds of issues likely to arise should help to flush out the bigger issues in time to allow them to be resolved.
The main thing to ensure is that the contract is clear about who is on the hook for which risk. And to ensure that these risks are dealt with appropriately, whether by a carrier or by one of the two parties internally.
Entering A World Of Pain? Regulation, regulation, regulation…
I have no intention of getting bogged down in this area, as it is properly a subject for lawyers. That doesn’t mean a quick “heads up” wouldn’t be of use…
Under normal customs rules, the importer (whichever party that is) is responsible for ensuring that the goods they place on the market meet the regulations under the local regime. This is a big change from the position applying under intra-EU trade, where the default position is that it is the manufacturer which is responsible for regulatory issues.
Anyone planning to act as an importer in a “third country” will therefore need to examine its obligations under the local regulatory regime to ensure it is fully compliant. It will also need to ensure that its customers – if the Incoterms and contract deem the customer to be the importer – understand what they are signing up to.
Given that both GB and EU rules work on this basis, there is definitely going to have to be some work in this area for Brexit purposes!
This rule will have an impact for businesses bringing goods from GB to NI, as the regulatory regimes will be different after 1 January 2021. Whether the two sides can come to some kind of sensible, practical arrangement to minimise or at least streamline the issues remains unclear at the date of writing. But here’s hoping!
Interestingly, as a possible Brexit “upside”, there may be some scope for having NI subsidiaries of GB parents act as the “responsible person” for regulatory purposes inside the EU.
It is often possible to transfer the responsibility from the importer to another named responsible person in the EU provided there is a written agreement providing for this. The following example shows how this could work in practice:
- Example 4: Beautiful Dreamer…
Sweet Dreams Cosmetics Ltd is based in Manchester and sells cosmetics B2B all over the EU as well as the UK.
From 1 January 2021, it will no longer be eligible to be the “responsible person” for EU regulatory purposes, because it will no longer be established in the EU.
Accordingly, Sweet Dreams Cosmetics Ltd sets up a subsidiary in NI, called Sweet Dreams NI Ltd. It then arranges for its lawyers to draft an agreement whereby its wholesale customers in EU countries pass the responsibility for EU regulation to with Sweet Dreams NI Ltd. Labelling and other matters are all drawn up on this basis.
Under this arrangement, the wholesale customers will act as the importer for the various transactions, but the Sweet Dreams Cosmetics group is legally responsible for ensuring all of the EU regulations are met. All parties are able to sleep at night, and some of them even have sweet dreams.
Note that, clearly, any such arrangement will only work if it is legally sound, which means getting a lawyer to examine the position in detail and to draft any relevant documentation.
It is vitally important to be aware of the relevant regulations in your sector. For most NI businesses, things should, according to the NI Protocol, remain much as they are today, but inevitably there will be “bumps” in certain areas, perhaps particularly when bringing goods in from GB either for onward sale or for processing.
How Can I Make Sure I Can Zero-Rate My Exports?
Where goods leave the UK and the EU as part of a commercial transaction and the conditions set out below are met, these supplies are zero-rated.
The conditions are similar to those for zero-rating dispatches, which were covered in last month’s Update. Essentially, the goods must leave the EU/UK and the supplier must be able to prove that they have done so. It is vital that the goods actually leave the EU/UK in order to be regarded as an export.
The evidence required to substantiate the second condition is discussed next.
Evidence of Export
The kind of documentation required is not discussed in detail. Essentially what is required is commercial evidence from third parties that the goods in question have left the UK within the required time limits. This is not a very interesting subject, and for that reason I would direct anyone who is looking at this to sections 6 and 7 of VAT Notice 703:
To summarise, the kinds of documentation required are very similar to the documents outlined in last month’s Update for dispatches.
The time limit for both actually removing the goods and for obtaining evidence of that removal is 3 monthsafter the time of supply. In practice, the time of supply will generally be the date the goods are removed or full payment is received.
Only goods which are involved in processing or incorporation prior to export have a longer time limit, in this case, 6 months.
The rules differ as between “direct exports” and “indirect exports”.
A direct export is one where the supplier is responsible for arranging the transport of the goods in question. This generally means it is easier to obtain the necessary documentation from freight handlers, etc.
An indirect export is one where the customer arranges for the transport outside the UK/EU itself. This imposes burdens of information-gathering on the supplier so that it can prove the goods left the UK.
VAT Notice 703 paragraph 3.4 sets out the following in respect of indirect exports:
The next 5 bullets have the force of law.
A supply of goods to an overseas customer… sent to a destination outside the UK or EU is liable to the zero rate as an indirect export where:
- overseas customer
- exports the goods from the UK or EU within the specified time limits and
- obtains and gives you valid official or commercial evidence of export as appropriate… within the specified time limits,
- keep supplementary evidence of export transactions…, and
- comply with the law and the conditions of this notice,
and the goods are not used between the time of leaving your premises and export, except where specifically authorised elsewhere in this notice or any other VAT notice.
There are other rules affecting exports for specific purposes (e.g.: for the Foreign & Commonwealth Office, etc), which are not discussed here.
Exports are generally easier to handle than imports (at this end of the transaction!) because the Government is keen to encourage exports and to collect duties on imports. However, it is very important to have your “ducks in a row” in terms of paperwork and so on, as HMRC are always keen to collect 20% VAT when they legitimately can…
Customs and Exports
I am not going to spend long on this point. Typically goods leaving the UK/EU will require an export declaration to be submitted.
For NI, we are assured that GB to NI movements will not require an export declaration. We are also assured that NI to GB movements will not require an export declaration. Apparently the EU doesn’t really agree with this approach, but the UK Government and HMRC have taken that line and they are the ones administering the NI Protocol (from our perspective).
I strongly suspect this will be revisited later on. And we are still not sure how “unfettered access” will work for NI to GB after 1 January 2021…
Summary: What Are The Key Points I Need to Remember?
Imports require significant administration and come with CDs and import VAT requirements. After 1 January 2021, import VAT will be postponed in most cases, being accounted for and recovered on the next VAT return.
However, “imports” from GB to NI are – surprise, surprise! – weird. They are imports for customs purposes, but (usually) domestic sales for VAT purposes. Enjoy!
Anyone acting as an importer in NI after 1 January 2021 will need an XI EORI number, and would be well advised to sign up for the TSS.
Traders will need to familiarise themselves with Incoterms and work out who needs to do what for movements of goods after 1 January 2021. It is to be expected that the big carriers and freight forwarders will do a roaring trade after 1 January…
There are a number of special procedures for customs – it is best to look at these in detail, as the rules are complex and must be strictly adhered to. They often require authorisations.
HMRC’s guidance in this area can be found in the relevant VAT Notices as follows:
Note that these Notices are bound to be subject to – possibly quite significant – changes between now and January 2021. The following links might also be useful:
International Chamber of Commerce (Incoterms):
Sign up for an XI EORI number (includes a link to the TSS):
Hopefully this post has been helpful, and should you wish to discuss any of the issues arising – or indeed anything else VAT-related – please don’t hesitate to contact me for a free, no obligation initial enquiry.