Alongside the future trading relationship between the EU and the UK, another important consideration for EU and UK companies is the issues they will face if they act as both the Importer and Exporter of Record (a business model adopted by many companies in existing intra-EU supplies) and use the most relevant INCOTERMS or international shipping terms. This is especially relevant if a business uses the terms of Delivered Duty Paid (DDP) and Ex-Works (EXW) for their commercial shipping terms.
In brief, with DDP terms, the seller of the goods is responsible, and bears all the risk for those goods, up to the designated delivery point specified by the buyer. This includes all export and import clearances and import duties and taxes.
Whereas in reverse, Ex-Works terms place the responsibility on the buyer. The buyer is responsible for all movements from the designated pick-up point of the seller as well as all subsequent export and import clearances and any duties and taxes.
These post-transition trading relationships are further complicated – even for unrelated trading businesses – in the EU and UK if they use these DDP and Ex-works INCOTERMS. In a DDP scenario a UK seller may need to have either a presence in the EU (to obtain an EU Economic Operators Registration and Identification number or ‘EORI’) or appoint a Fiscal Representative on Indirect Representation terms. This is because, as mentioned above, the UK seller is responsible, under these terms, for all customs formalities at export from the UK and all customs formalities, and the payment of any customs duty and Import VAT, on arrival at the EU destination.
To further complicate matters, the onward supply in the EU may be then considered to be a domestic supply for VAT purposes and require a local VAT registration to account for the amount charged to the final customer as a domestic sale.
The same parameters are true for a comparative movement for an EU seller on DDP terms. Companies may want to consider agreeing a more favourable term such as Delivered at Place (DAP). This still maintains the same level of risk and responsibility for the physical movement of the goods but removes the responsibility for rendering customs declarations and being responsible for any import taxes.
In respect of an Ex-Works movement from the UK to the EU, an EU buyer would be responsible for all customs formalities at export from the UK and all customs formalities and the payment of customs duty and import VAT on arrival in the EU. Therefore, in this case the EU buyer may need a UK EORI to complete an export declaration from the UK.
Again, the same is true in reverse for a UK buyer/EU seller importing/exporting from the EU on an Ex-Works basis. The UK buyer would likewise need an EU EORI to lodge an export declaration in the EU. Hence, the UK company would need to consider how to best obtain such a registration. Likewise, an EU seller would also have to consider how to obtain such a UK EORI registration.
In respect of alternatives to this term, companies may wish to consider an F-Incoterm such as Free Carrier (FCA), Free on Board (FOB) or Free Alongside Ship (FAS). FCA terms mean that the seller usually delivers the goods to a named and agreed place – likely the freight forwarder’s premises – and the seller is responsible for export clearance. This simple change could assist in potentially removing the requirement for a buyer to lodge an export declaration in a foreign jurisdiction and having to consider some form of local registration or additionally instructing a tax agent or representative.
In conclusion, as we can see, there is a lot to consider over the next nine months. Businesses should therefore carefully consider their trading position with their EU counterparts and the commercial terms that they agree upon.
Would you like to know more?
If you would like to learn more about how Brexit may impact you, please visit our Practical Guidance: Brexit hub here.
And if you have any questions or would like to discuss your specific circumstances, please get in touch with your usual Blick Rothenberg contact or one of the partners on this page.