• For any business that exports or imports to and from EU member states and would have to do so as a non-EU entity in a no-deal scenario, the post-Brexit customs rules will be a major change
• In a no-deal scenario, cross-border trade between the UK and the EU would take place under World Trade Organisation (WTO) rules, with tariffs applied to goods moving across the border in either direction
• Business should consider reviewing contracts governing relationships with suppliers and/or corporate customers and discuss possible mitigations

In a no-deal scenario, cross-border trade between the UK and the EU would take place under World Trade Organisation (WTO) rules, with tariffs applied to goods moving across the border in either direction and import VAT payable on goods purchased by UK businesses from EU-based suppliers.

Customs duty would be payable on goods moving from the UK into the EU, and UK exporters would need to file an electronic customs declaration, describing the nature, value and destination of the goods. Movement of goods might also be disrupted by additional inspections of trucks at the border, or by the UK leaving the single aviation market.

In the summer of 2018, the government published a range of materials designed to help businesses prepare for a no-deal outcome. It also said all exporters and importers in the UK will need to register for a UK Economic Operator Registration and Identification (EORI) number in the event of a no-deal Brexit.

Paul Hardy, Brexit director at international law firm DLA Piper, advises businesses of varying types and sizes and says the government’s technical notices outlining the consequences of a no-deal Brexit are a good starting point when planning ahead. UK exporters can also find more information about the tariffs that would be applied to their exports on the European Commission website .

For any business that exports or imports to and from EU member states and would have to do so as a non-EU entity in a no-deal scenario, the post-Brexit customs rules will be a major change. Some businesses may find it useful to consult and possibly outsource part of this process to a customs broker, freight forwarder or other logistics service provider, but this will have cost implications.

Letters of credit

A no-deal Brexit could lead to increased use of letters of credit by companies trading across the UK/EU border. Letters of credit are widely used and offer a guarantee from a bank: of payment from a buyer or, in effect, a refund to a buyer who does not receive goods they have purchased. The letter of credit is paid once the bank receives documentation proving delivery of the goods, although sometimes the buyer or bank may impose additional requirements before payment is made.

Banks also offer exporters export letters of credit, sometimes called documentary credits, through which the exporter’s bank obtains an undertaking from the buyer’s bank that payment will be made.

Using letters of credit is not always straightforward or indeed possible: a bank will only issue one if it is confident a buyer will pay for goods purchased. Sometimes the buyer may need to provide immediate payment to the bank, to allow the bank to freeze the requisite funds in its account, or ask the bank to open an additional line of credit. It’s essential to check all details within a letter of credit and ensure the business can meet any obligations imposed upon it before the agreement is signed.

Any exporter or importer that does not currently use letters of credit and is considering doing so should consult their bank. The UK government advises companies using them for the first time to use “confirmed and irrevocable” letters of credit. Further information can be found here.

Authorised Economic Operator status

One option in the longer term will be for firms to seek Authorised Economic Operator (AEO) status, which accelerates customs processes. Hardy agrees that AEO status could be useful at some stage, whether or not a Brexit deal is agreed, but points out the process can be expensive. It might also make more sense to apply for AEO status after the UK’s finally agreed leaving date, as an application begun before then will be made under the auspices of the EU while the UK is still a member state.

Another option – also likely to be beyond the budget of many SMEs – is to create a customs warehouse facility, where goods can be stored before customs duty or import VAT are paid, thus helping to mitigate the effects of disruption in cross-border movement on the flow of goods to EU-based customers. This will require authorisation by the customs authority within the country where the warehouse is located.

Regulatory standards

Cross-border trade may be complicated further by regulatory standards. The UK government has suggested that in the immediate aftermath of Brexit it would regard goods that have received EU authorisation to have met the UK standard – which in many cases is based on the EU standard. But it’s not yet clear for how long that will continue to be the case, or whether the EU will reciprocate.

At present, goods brought into the UK from the EU by VAT-registered traders are classified as acquisitions and VAT must be accounted by the importer on a VAT return, usually at the same rate payable if the goods had been purchased from a UK supplier. However, importers can normally reclaim this if the acquisitions relate to VAT taxable supplies you make.

But there’s a chance that, post-Brexit, the importer would need to pay the VAT upfront, at the same time as it paid customs duties, rather than when filing a VAT return.

Additional changes may follow for UK businesses: the Taxation (Cross Border Trade) Act 2018 was passed to enable the government to create a new UK customs duty regime once the UK leaves the EU, with or without a deal. The act allows for the abolition of Acquisition VAT, with all imports into the UK to be subject to import VAT instead. The government has also said it will introduce postponed accounting for import VAT, via the VAT return, in the event of a no-deal Brexit.

In the meantime, some businesses may be able to reduce the impact of VAT liabilities on cash flow by using the Duty Deferment Scheme (DDS) to make monthly payments to HMRC. To do this, your bank effectively gives HMRC a guarantee your business will be able to meet all the VAT and duty costs you encounter.

Businesses can also apply for Simplified Import VAT Accounting (SIVA) approval, which reduces the amount covered by the DDS to cover only duty, not VAT. Businesses wishing to do this will need to demonstrate a high degree of control and visibility over their operations and flow of goods through their supply chain. Businesses that have not been registered for VAT for at least three years may also be subject to additional financial tests when applying for SIVA approval.

Find out more about the DDS and SIVA here. If you’re interested in joining the Duty Deferment Scheme, you’ll need to consult your bank.

Reviewing relationships

Business should also consider reviewing contracts governing relationships with suppliers and/or corporate customers. “The really big issue is if a business is contractually obliged to supply a product within a certain timeframe in a certain form,” says Hardy. “What’s your liability to your customer in terms of that supplier in the event of a delay?” Contracts should be reviewed to reflect the potential for delays and increased cost when goods have to cross the border.

Hardy suggests discussing possible mitigations with suppliers or customers. He points out that, in contract law, relying on a force majeure clause – which relieves parties from having to fulfil contractual obligations if caused by unavoidable circumstances – will only work if a company has completed all necessary due diligence.

Such due diligence and more detailed mapping of the supply chain could help businesses plan for the possibility of having to explain where every component in their finished goods has come from, in accordance with rules of origin imposed under a new free trade deal signed with the EU or another country, says Lesley Batchelor, director general at the Institute of Export International Trade.

It’s possible a no-deal Brexit will accelerate a transition to a free-trade deal with the EU and other countries around the world, but in the short term, a no-deal exit from the EU will leave many UK businesses needing all the help they can get. For now, says Batchelor, the best course of action is: “Do your research – find out about WTO rules and what impact they will have on your business.”

Trade associations and service providers, from banks and accountants to lawyers and logistics providers, may all be able to offer some help, but the onus is on businesses to ensure they make the best of a no-deal Brexit.