The trade and security deal the UK Government struck with the EU is a bare-bones deal for tariff-free trade in goods. For many other business sectors that are not covered by the trade deal it means a no-deal outcome creating significant frictions and less EU market access from 1 January. Below we explore what it means for the Retail industry.
Brexit deal outlook: The ending of schemes that benefited overseas consumers, supply issues between Northern Ireland and the rest of the country, VAT registration requirements for online retailers, and the end of distance selling rules mean there are challenging times ahead for the UK retail industry.
Historically, visitors from outside the EU have been able to claim a VAT refund on items bought in the UK and taken home, but this has been abolished since the start of the New Year because it would have to be extended to EU citizens. The Government is concerned that the cost of retaining the relief would outweigh the benefits.
However, the UK has recently become a shopping destination for overseas visitors and the UK will lose out to other European countries which will maintain the scheme going forward. By scrapping this scheme, the Government has increased the costs to the consumer by 20%. Many tourist-focused retailers such as Selfridges, Harrods and Bicester Village have warned that the decision could cost billions of pounds in spending from overseas visitors which will curb investment in those retail sites.
Supermarkets and other retailers are now reporting increasing problems with the supply of goods to Northern Ireland from the rest of the country and of the supply of goods between Northern Ireland and the Republic with supermarkets reporting food shortages of basic foodstuffs as well as other goods.
The issue has been encapsulated in the reported ‘Percy Pig problem’. Issues arise because the pig-shaped sweets are actually manufactured in Germany (within the EU) and imported into the UK. If these are then sent on to Ireland, which is also within the EU, then in theory tax is due on them unless advantage is taken of the available reliefs. Relief is available for goods which originate in one EU country but are then exported to another via a third country and is called the returned goods relief. Retailers are going to have to fully understand the origin of their goods so that they can claim relief for tariff free trade. We explore this issue further in our article here.
Then there is the issue of VAT registration for online retailers which are selling to consumers and not businesses in the EU. For businesses selling to other businesses in the EU the sale will be zero rates for UK VAT and the EU business will account for local VAT on the import. In February a UK sweater manufacturer reported that they had seen sales the EU drop to by 58% in the last month. One of the issues was that a jumper in their range was rendered an animal product by the EU and slapped with a €200 import bill.
From 1 January 2021 the UK business can zero-rate the supply to the EU non-business customer. However, the issue arises that the EU customer will have to account for VAT in the EU on their purchase, usually through the postal service or courier. This puts the UK retailer at a disadvantage to EU suppliers.
The likely impact is that the UK retailer will need to register for VAT in the country the goods are going to and act as the importer. It would then pay the import VAT and claim this back on the VAT return of that country and then charge local VAT to its customer. This may mean that the UK supplier will have to register for VAT in all countries it trades in.
It could, alternatively, create an establishment in one EU country and hold stock in that EU country and make use of the distance selling thresholds for supplies to all other EU countries. This may also have direct tax consequences.
Online retailers and UK producers of goods which sell direct to EU consumers are going to have a significant compliance cost going forward both in terms of registering in potentially all 27 EU member states and in ensuring it is monitoring sales and paying over VAT in the right jurisdictions.
A further issue is that the EU is changing its rules for supplies across national boundaries in the EU. From 1 July 2021 the EU is removing the distance selling rules for e-commerce businesses. It is creating what is called a one-stop shop (OSS) where one VAT return will be completed for all sales within the EU (but using the VAT rate for each of the individual states where the goods are sold). For a UK business to make use of the OSS system it would need to register as a ‘non-Union’ VAT payer in one EU member state of its choosing. This will create a solution for supplies made to the EU from 1 July.
EU Customs presence
Finally, another important consideration is that both the UK and EU now require a physical presence in each territory if there are disputes over payment and compliance with customs changes.
Many EU companies do not want the additional risk and cost of being responsible for compliance with customs procedures. Large EU importers of UK goods want the products delivered to their warehouse door, with the UK exporter taking that responsibility.
One other option is to pay an official distributor or a customs and freight forwarding agent in the EU to bear the risk that new paperwork and payment obligations are satisfied. However, these are rare and expensive in the EU.
The only working solution at the moment seems to be to set up a branch or subsidiary in order to comply with the customs rules
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.