This briefing was updated on 8 January 2021 to reflect the provisions of the UK-EU trade deal.
Brexit is set to have a major impact on goods supply chains and the trade deal with the EU, though welcome, is unlikely to make a significant difference, except when it comes to tariffs. Our Q&A explains why and sets out what importers and exporters need to do in order to adapt to these changes. Please note that this Q&A focusses on goods trade between Great Britain and the EU and does not cover the position as regards Northern Ireland.
Brexit and goods trade: what you need to do to prepare - updated January 2021
This briefing was updated on 8 January 2021 to reflect the provisions of the UK-EU trade deal.
- How much difference will the UK-EU trade deal make?
- What are the key changes for imports of EU goods from 1 January 2021?
- What are the key changes for exports of UK goods to the EU from 1 January 2021?
- What are the risks of getting border paperwork wrong?
- What needs to be done to comply with new border requirements?
- Is there likely to be disruption to goods supply chains – and how bad could it be?
- What can I do to mitigate the risk of disruption?
- Do I need to worry about imports from non-EU countries?
- I only buy goods from UK wholesalers – why should I worry?
- Contractual issues and Incoterms: what do I need to check?
- How does VAT apply and what changes should I make?
- Do I need to be concerned about proof of origin?
- What records should be kept and why?
- How do I prove that products comply with relevant standards?
How much difference will the UK-EU trade deal make?
The UK is leaving the EU Single Market and Customs Union. As a result, significant additional border red tape, such as the requirement for customs declarations, will apply, notwithstanding the Trade and Cooperation Agreement (TCA) signed by the EU and the UK in December 2020. It is these changes which are widely expected to lead to material disruption (see Question 6). The TCA, though welcome (and very much preferable to "no deal"), will only make a difference in the two areas outlined in the textbox below:
HOW A TRADE DEAL WILL MAKE A DIFFERENCE
- Tariffs: the deal will result in zero tariffs for all qualifying goods. However, this aspect of the deal will do nothing to ease the problem of additional red tape. In some respects, it will make it worse, because an importer or exporter will need to take additional steps to prove the origin of goods in order to benefit from preferential tariff treatment (see Question 12).
- Trust and cooperation: the level of disruption at the border will depend to some extent on how far relevant authorities in the EU and the UK are prepared to either waive certain requirements or tolerate a level of non-compliance (at least initially). This in turn requires a reasonable level of trust and cooperation on both sides, which is more likely to be present with a deal. The TCA also contains provisions on cooperation in customs matters, which is helpful, although it may take some time for the benefits to be felt.
The TCA could have made a more significant difference in the short term if it had provided for an implementation period for the introduction of additional border red tape. This would have given businesses more time to adapt and reduced the risk of disruption. However, with the exception of rules on proof of origin (see Question 12), the TCA contains no "grace periods" in relation to goods trade (although as explained below, the UK is applying various grace periods in relation to imports from the EU – see Question 2).
What are the key changes for imports of EU goods from 1 January 2021?
Until the end of the transition period, the UK continued to be treated as if it were part of the EU Single Market and Customs Union. This meant that goods could enter the UK from the EU without customs declarations and with minimal red tape. However, from 1 January 2021, the level of red tape is set to increase substantially – and if goods do not meet the origin requirements in the UK-EU trade deal (see Question 12), tariffs may also be payable on imported goods.
1 January 2021
From 1 January 2021, as a temporary measure, most goods imported from the EU will be allowed to enter the UK without providing full customs paperwork "upfront" (as is currently required for goods entering the UK from non-EU countries).
Instead, most businesses will be able to make customs declarations and pay any applicable tariffs "in arrears" (within 6 months of the point of import). Similarly, import VAT will not have to be paid at the point of import; it can be paid at a later date, by using postponed VAT accounting (in the case of VAT-registered businesses – see Question 11 for more detail). However, "upfront" customs declarations will be required in respect of controlled goods (e.g. medicines, firearms, etc) and excise goods (e.g. tobacco and alcohol). UK Safety and Security declarations will also not be required, further reducing the level of paperwork required on an "upfront basis".
For most goods, the level of physical checks is likely to be very low at this stage, although all "high risk live animals and plants" will still be subject to such checks. However, these will take place away from ports, to help to avoid congestion. Physical checks will not be required on most food products until April; this is significant because, unlike the majority of other types of product (where only a small percentage are subject to physical checks), the normal rule is that all food entering the UK must undergo a physical check. This easement should therefore help to avoid delays to food imports from the EU, at least until 1 April – although material disruption may still occur (see Question 5 below).
Changes to UK imports are being phased in over 6 months – but this does not mean extra red tape is being entirely waived. Instead, businesses will effectively have a 6 month "grace period" in which to provide customs declarations and pay any charges such as tariffs.
1 April 2021
From 1 April 2021, all products of animal origin (e.g. meat, honey, milk, egg products) and regulated plants/plant products will require paperwork (including the relevant health documentation) to be provided "upfront". They will also be required to undergo physical checks before entering the UK, although at this stage, these checks are expected to be carried out at locations away from ports (with a view to easing congestion at ports).
From 1 July 2021, all imports will be required to have full "upfront" paperwork including customs declarations and UK Safety and Security declarations.
1 July 2021
From 1 July 2021, the Government expects to have moved to the same system that applies now for products from outside the EU entering the UK. Full "upfront" paperwork will be required including customs declarations, together with UK Safety and Security declarations. Where goods do not meet the origin requirements in the UK-EU trade deal (see Question 12), any applicable tariffs will need to be paid "upfront" as well (although VAT-registered businesses will still be able to use postponed VAT accounting to avoid having to pay Import VAT "upfront"). A higher level of physical checks is also envisaged across all types of goods (although, as a percentage of overall border traffic, it is likely to remain at a relatively low level i.e. the vast majority of consignments will not be subject to physical checks). Physical checks on products of animal origin etc will be carried out at Border Control Posts (which are in most cases likely to be located at ports or, if there is insufficient space, then within relatively easy reach of ports).
WILL THIS PHASED APPROACH AVOID DISRUPTION TO SUPPLY CHAINS?
The phased approach to the introduction of new requirements will probably help to some extent, but for a variety of reasons (explained in more detail below – see Question 6), disruption to supply chains remains likely – and could be significant. Even if all goes smoothly in 2021, price rises are almost inevitable at some point, to reflect the additional costs incurred in importing goods from the EU (as compared with the current position). Indeed, it is entirely possible that some EU suppliers may decide to stop serving the UK market altogether (owing to the extra cost and administrative burden).
What are the key changes for exports of UK goods to the EU from 1 January 2021?
Until the end of the transition period, the UK continued to be treated as if it were part of the EU Single Market and Customs Union. This meant that goods could enter the EU from the UK without customs declarations and with minimal red tape. However, from 1 January 2021, full border controls will apply i.e. goods from the UK will be treated in exactly the same way as goods from non-EU countries.
The EU is not offering a temporary waiver of any of its normal border processes for UK exporters – full border controls are expected to apply to UK goods exports from 1 January 2021.
As a result, goods arriving from the UK will need to be accompanied by the correct paperwork (including customs declarations and safety and security declarations). If goods do not qualify for preferential (zero tariff) treatment (see Question 12), then tariffs may also be payable – and these must usually also be paid upfront before the goods will be cleared to enter the EU (although note that, unless agreed otherwise, the usual default position is that tariffs are paid by the importer, not the exporter).
Products of animal origin (e.g. meat, honey, milk, egg products) and regulated plants/plant products must enter the EU via a Border Inspection Post, where they will be subject to physical checks. Such products must also be accompanied by additional documentation, such as vets' certificates in the case of products of animal origin.
Why isn't the EU phasing in these changes?
Unlike the UK (see Question 2), which is planning to phase in changes to UK-EU border processes over the first 6 months of 2021, the EU is not currently proposing to provide temporary easements in respect of any of its normal border processes for goods from non-EU countries (including the UK). There are a number of reasons for this difference in approach:
REASONS FOR THE LACK OF EU EASEMENTS
- Although the picture will obviously vary between sectors and individual businesses, the EU as a whole is not particularly reliant on goods exported from the UK. EU businesses which currently rely on UK suppliers can, in many cases, switch to competing suppliers based within the Single Market (which will not face the same additional costs and administrative burdens); the EU is likely to view such switching as being to its advantage, which reduces the incentive to make life easier for UK exporters. The UK, by contrast, relies on the EU for 49% of its imports – which is much harder to replace (hence the UK's decision to make a number of transitional easements available to businesses importing from the EU – see Question 2).
- On the face of it, EU border authorities appear to be somewhat better prepared than their UK counterparts. For example, at the time of writing, a number of key UK systems had yet to be tested or rolled out to business; by contrast, a number of EU authorities claim that their systems are ready and have already been subject to testing. That said, it remains to be seen whether EU border processes will work smoothly from "Day One", given the substantial volume of UK exports and the extensive reliance on HGVs (as opposed to unaccompanied containers arriving at EU ports via short-sea shipping).
- The EU might have been open to negotiation of an implementation period for new trading arrangements, but it does not appear that the UK requested this. In particular, the concept of an implementation period has not been referred to as a formal negotiating stream in the talks on the future trading relationship.
What are the risks of getting border paperwork wrong?
Failure to complete border paperwork correctly may lead to delays at ports, airports or border crossings while the issue is resolved – or in a worst case scenario, the goods may be sent back to the UK or EU (as the case may be) or impounded by the relevant customs authorities.
Your business may also incur fiscal penalties; for example, in the UK, fines range from a minimum of £250 up to a maximum of £2,500 per contravention, although where there are multiple contraventions, the cumulative fine could potentially be much higher.
Problems at the border can also have a number of significant knock-on effects, such as:
- Your business may incur extra costs e.g. because a lorry driver has to spend three days on the journey rather than one or two;
- Your business may be in breach of contract, for example because delivery deadlines are missed;
- Your business may be disrupted because you do not have the components or raw materials to manufacture your products and/or you do not have the goods to meet demand from customers;
- Duty relief or VAT zero-rating may be disallowed;
- Repeated contraventions of customs requirements may also result in loss of the ability to make use of certain advantageous customs procedures, where a good compliance record is required.
What is the usual approach to fines?
Typically in the UK, fines would only be imposed after a warning letter had been issued – and would also not normally be issued if you discover and disclose a contravention voluntarily. As regards the EU, some Member State customs authorities have indicated informally that they may decide not to impose fines for less serious contraventions (particularly if they are a "first mistake"). However, the prospects for a relatively lenient approach by EU authorities are likely to be higher if a trade deal with the EU can be agreed; in the absence of a deal, UK businesses should not expect to be given much leeway in terms of compliance.
What needs to be done to comply with new border requirements?
This section only deals with steps you need to take in order to comply with new border processes as between Great Britain and the EU; it does not cover goods trade with Northern Ireland, where different arrangements are likely to apply. You also need to consider whether you need to (a) make changes to your contracts with customers (see Question 10); and (b) take other steps to protect your business against the high risk of disruption to goods supply chains next year (see Question 7).
Engage a customs intermediary
Although it is entirely possible for businesses to submit customs declarations and deal with other border formalities in their own right, we recommend that a customs intermediary is engaged to assist with this work, as it is highly technical and previous experience of dealing with customs authorities is often advantageous. However, there is currently a shortage of customs intermediaries in the UK (particularly as regards more experienced staff), which may mean that businesses will be forced to undertake more of the relevant work themselves. It is also important to note that:
- Different types of intermediary offer different levels of service and accept different levels of liability; for example, a customs broker will typically offer a more comprehensive service than a freight forwarder (click here for more details); and
- Simply engaging an intermediary is not sufficient; you will need to be ready and able to provide them with a significant amount of information about the products that your business imports or exports (and an intermediary cannot do this for you). This is likely to include information that you did not previously have to provide when trading with the EU (see below).
Businesses wishing to deal with customs declarations themselves will need to acquire specialist software and training on the relevant UK government IT systems (note that different IT systems are used for exports, imports and safety and security declarations respectively).
APPLY FOR A GB EORI NUMBER
An Economic Operator Registration and Identification (EORI) number is required for all businesses importing or exporting goods to or from Great Britain – although VAT-registered businesses which trade with the EU should already have one, as these were enrolled automatically in 2019.
Information/documentation you will need to supply
In order to complete a customs declaration, your customs intermediary will need a significant amount of information, some of which businesses may not be used to providing when trading with the EU. This includes:
- EORI number (see above)
- Commodity code of relevant products (this is an 8-10 digit code) – we can help you find this information
- Value of consignment for customs purposes – click here for more detail
- A detailed packing list, itemising the goods contained in each package, indicating the type of packaging (e.g. crate, drum etc) and providing dimensions and weight for each package
- Details of how the goods are being transported and which Incoterm applies (see below).
Exporters may need to make changes to their invoicing systems in order to ensure that this information can be generated quickly and efficiently. Importers should liaise with suppliers to ensure that they will be able to provide all the information needed to ensure that goods can be cleared through UK customs.
From 1 January 2021, trading with the EU will involve the provision of significantly more information than in the past, which may require changes to IT systems. The time and effort required to achieve this is often underestimated.
Additional actions for importers
- Duty Deferment Account (DDA): A DDA allows customs charges to be paid on a monthly basis by Direct Debit (rather than per individual consignment) and is a requirement for simplified procedures (see below) You will need to either apply for your own DDA or confirm that your customs intermediary is prepared to allow you to use theirs. In the past, a Comprehensive Customs Guarantee was normally required for a DDA, but you can now apply for a waiver.
- Simplified customs procedures: Make sure that your customs intermediary is authorised for simplified customs declarations, or failing that, apply for authorisation yourself (most businesses should be eligible unless you have a poor recent compliance history with respect to tax and customs obligations). Authorisation enables you to make customs declarations in arrears for the first 6 months of 2021, taking advantage of the easements set out in Question 2.
- Prepare to pay import VAT: see Question 11.
- Proof of origin: You will need to obtain proof of origin documentation from the supplier in order to secure preferential tariff treatment (without it, you may have to pay tariffs on the goods). See Question 12.
- Additional product documentation: Make sure that your suppliers will provide the documentation you need to prove that the products meet UK standards (and that the products will be appropriately labelled). See Question 14.
Businesses may also need to modify their record-keeping systems – for example, exporters will need to retain proof that the goods have left the UK, otherwise they may find themselves being held liable by HMRC for UK VAT.
Additional actions for exporters
- EU EORI number: If your customers in the EU expect you to deal with customs clearance on entry to the EU, you may need to obtain an EU EORI number and make arrangements with customs intermediaries in the EU.
- Proof of export for UK VAT purposes: To ensure that the supply is zero rated for UK VAT purposes, you will need to retain records proving that the goods were exported – this will usually be the "Goods Departed Message" from the UK export IT system. See Question 11.
- Proof of origin: Your customers may expect you to provide proof of origin documentation in order to secure preferential tariff treatment (without it, they may have to pay tariffs on the goods). See Question 12.
- Additional product documentation: Your customers in the EU will also expect you to provide the documentation needed to prove that the products meet EU standards (and that they are appropriately labelled). See Question 14.
- Export licences: For certain controlled goods (such as items with potential military/security applications), an export licence is required from the UK authorities. For more details, see this briefing.
Points to check with hauliers
- Check that the haulier will have any necessary permits to operate in the UK or EU (as the case may be).
- Check that, where relevant, all drivers have obtained the correct type of international driving licence and have at least 6 months to run on their passports.
- Where relevant, check that the haulier is aware of and knows how to obtain a Kent Access Pass (see Question 6).
Is there likely to be disruption to goods supply chains – and how bad could it be?
Disruption to goods supply chains is widely expected, primarily as a result of the introduction of additional border red tape on EU-UK trade on the UK's exit from the EU Single Market and Customs Union at the end of the Brexit transition period. See also our briefings Brexit and goods trade: what will be the impact? and The impact of Brexit and COVID-19 on UK ports, distribution and manufacturing.
New customs checks and poor trader readiness mean that delays at the GB–EU border are inevitable in January.
Delays and congestion at Channel ports
In the short term, the lack of easements on the EU side (see Question 3) means that the risk of delays to HGVs arriving from the UK will be higher. However, this does not mean that imports into the UK will be unaffected. On the contrary, past experience indicates that delays on, for example, the French side of the Channel are likely to have a knock-on effect, leading to delays on the UK side as well. The UK Government's own "Reasonable Worst Case Scenario" suggests that such delays could lead to queues of 7000 lorries building up at Channel ports. And although the UK measures should ease the position for HGVs arriving in the UK, vehicles relying on transit procedures – which may well be used for HGVs destined for the Republic of Ireland, for example – will be expected to comply with relevant formalities in full from 1 January 2021. This means there is potential for delay on entry to the UK side as well.
Customs and logistics experts giving evidence to MPs in September 2020 put the chances of "chaos in Kent" at 50-80%.
High levels of preparedness could do much to reduce the risk of delays. However, there is evidence that the UK Government and a significant number of UK businesses are not particularly well prepared for the changes coming on 1 January 2021. For example:
- At the time of writing (November 2020), key UK IT systems had not yet been tested, including systems designed to help avoid congestion at ports (see below).
- Additional infrastructure is likely to be needed to help manage traffic and carry out certain border processes away from ports (see below). Although sites have been identified, it is not clear whether all of them will be ready in time for 1 January 2021 and several will not be available until July 2021.
- There is a shortage of customs intermediaries in the UK to assist businesses in complying with new requirements (the shortfall is estimated to be in the tens of thousands).
- Surveys indicate that a third of businesses do not appreciate the full extent of the changes coming on 1 January 2021 and many appear to expect an extension of the transition period (which currently seems unlikely). These businesses may well be poorly prepared. Meanwhile, COVID-19 has also taken attention away from Brexit preparation.
- There is a shortage of wooden pallets compliant with ISPM 15, which is the standard the EU requires for transport of goods from non-EU countries; this is significant because UK consignments on non-compliant pallets could, potentially, be refused entry to the EU, also giving rise to delays.
- There is a shortage of vets to deal with export health certificates, which may result in delays for shipments of food products.
There is likely to be significant disruption at the border from 1 January 2021 as many traders and third parties will not be ready for new EU controls.
Measures to manage congestion
With a view to managing congestion, authorities on both sides of the Channel are looking to put in place systems designed to ensure that HGVs cannot enter port zones unless they have already lodged the necessary documentation electronically (at which point they will be cleared to enter).
Most EU countries with roll-on roll-off ports that trade with the UK have already put such systems in place. However, the UK appears to be much less advanced in its preparations and the primary system to support this model (known as the Goods Vehicle Movement Service or GVMS) is not expected to be in place until July 2021. In the meantime, the UK is proposing to rely on a web-based portal known as the "Check an HGV is Ready to Cross the Border" service (formerly referred to as "Smart Freight") aimed purely at UK exports - but at the time of writing (November 2020) this does not appear to be ready. It is also expected to be unable to verify whether the necessary documentation has in fact been completed correctly. Additionally, the UK is planning to require hauliers wishing to use the Channel Ports to obtain a "Kent Access Pass"; fines of £300 may be imposed if this cannot be produced.
In a further measure intended to help manage congestion, the UK Government has designated a number of sites that will be used where roll-on roll-off ports do not have sufficient space. For example, the following locations may be used to provide lorry parks (for traffic management) and to carry out certain border processes:
- South East: Ebbsfleet International Station, North Weald Airfield, Sevington Ashford, Ashford Waterbrook, Dover, Thames Gateway
- North West: Warrington
- Wales: Holyhead and "South Wales" (location unspecified)
- Midlands: Birmingham
However, a number of these locations are not expected to be ready until July 2021 and it is unclear how many will be available for use in time for 1 January 2021.
What can I do to mitigate the risk of disruption?
As explained earlier, the risk of your goods being delayed will increase if your business is not ready to comply with new border processes – so preparation for this aspect is key. However, it is also possible that supply chains are disrupted through no fault of your own. To mitigate this risk, UK businesses which rely on goods from the EU should consider the following:
- Stockpiling: Stockpiling goods is a logical way of mitigating the risk of supply chain disruption, but commercial warehousing space is likely to be in short supply partly because of Brexit stockpiling and partly because of the run up to the Christmas period. Given these constraints, and with additional pressure on finances because of the impact of COVID-19, businesses may wish to explore the scope of maximising the use of existing premises for storage purposes – see this briefing for more detail.
- Alternative sources of supply: It is also worth exploring the availability of alternative sources of supply, should your existing suppliers be unable to deliver on time. Contractual mechanisms such as priority supply obligations, options and rights of first refusal can be put in place to support this - see this briefing for more detail of how contracts can help to mitigate the risk of Brexit-related goods shortages.
- Alternative supply routes: The risk of disruption is highest at ports focussing on roll-on-roll off traffic, which do not have tried and tested systems to cope with high volumes of traffic requiring customs clearance and related border checks. Businesses may be able to avoid the disruption altogether by switching to other routes, such as short sea shipping to or from UK ports which are already well used to dealing with customs processes (because they handle higher volumes of traffic from non-EU countries). Short sea shipping usually involves unaccompanied containers which are then unloaded onto an HGV at the port of arrival, for onward distribution to their final destination. That said, such ports are not immune to disruption – for example, there have been press reports of delays at UK ports such as Felixstowe, due in part (it would appear) to COVID-19. Consequently it may be prudent to plan for a degree of flexibility as to which UK ports you use.
You should also review your contractual arrangements with suppliers or customers to ensure that you are clear about your options if you (or they) are adversely affected by Brexit-related disruption – see Question 10.
Do I need to worry about imports from non-EU countries?
From a purely legal perspective, we would not expect Brexit to raise material additional barriers to trade for the vast majority of imports of goods from non-EU countries (although note the points made below about rollover of existing EU trade agreements). However, from a practical perspective, there could be an impact if those goods reach the UK via the EU.
For example, if the goods you import are shipped first to Rotterdam, and then distributed to the UK on HGVs via the Channel ports, they will be at risk of being affected by Brexit-related disruption. If the goods do not meet the origin requirements in the UK-EU trade deal (see Question 12), you could also end up paying two sets of tariffs – once on entry into the EU, then again on entry into the UK.
If you rely on goods from non-EU countries, you may have a problem if those goods reach the UK via the EU.
So it is worth investigating whether any goods from the rest of the world which are important to your business could be affected by Brexit. The key question is how you or your suppliers bring those goods into the UK. If the goods are shipped directly from a non-EU country to a UK port which typically deals with non-EU trade, this is less likely to be an issue. That said, there have been press reports of delays at UK ports such as Felixstowe, due in part (it would appear) to supply chain disruption caused by COVID-19. It is also possible that such ports could have to deal with additional traffic because businesses trading with the EU have opted to use them instead of the Channel ports (in order to avoid expected disruption at the latter). If there is already a backlog due to COVID-19, then additional demand will only worsen the position. Consequently it may be prudent to plan for a degree of flexibility as to which UK ports you use.
ROLLOVER OF EU-NEGOTIATED TRADE AGREEMENTS
Although the vast majority of goods from non-EU countries should not face additional trade barriers because of Brexit, this may not be true for imports of goods from countries with which the EU has negotiated free trade agreements. Unless the UK has managed to conclude "rollover" or continuation arrangements, tariffs on those imports may increase in line with the UK's revised global tariff schedule (see this briefing). A list of the relevant countries can be found here. If no replacement arrangements have been agreed, we can help you work out whether the goods you import would be likely to face higher tariffs under the UK's revised global tariff.
I only buy goods from UK wholesalers – why should I worry?
If you buy from UK wholesalers, it will be their responsibility to deal with the additional red tape outlined above (and to deal with payment of tariffs, if the goods do not qualify for preferential treatment under the UK-EU trade agreement – see Question 12) But if, ultimately, your wholesaler is unable to deliver the goods you need to run your business, their problem will rapidly become your problem. In view of this, we strongly recommend that you make your own assessment of your wholesaler's contingency plans to deal with any Brexit-related disruption. Unless you have made this assessment, you cannot decide whether you need to develop your own contingency plans to deal with potential disruption, such as stockpiling or investigating alternative sources of supply etc – see Question 7.
KEY QUESTIONS TO ASK WHOLESALERS
- Are the wholesaler's goods sourced from the EU? If not, are the goods shipped first to the EU and then distributed to the UK (see Question 8)? If the answer to either question is "yes", there is likely to be exposure to Brexit-related disruption.
- If the goods are sourced from the EU, what have they done to prepare for new border processes (see Question 5)?
- What are their contingency plans for dealing with Brexit-related disruption (see Question 6 and Question 7)?
You should also consider your contractual arrangements with your wholesaler – in particular, to what extent can it pass on any additional costs it incurs and what are your options if it cannot meet its contractual obligations? See further Question 10.
Contractual issues and Incoterms: what do I need to check?
Any UK business that relies on goods supplied from or via the EU (even if it does not import them itself but relies on others – such as UK wholesalers - to do so) should review its contracts with key suppliers with a view to answering the following questions:
- Who will be responsible for compliance with customs formalities and other additional red tape (and who will bear the cost)? See discussion of Incoterms below and note in particular the VAT implications of using certain Incoterms.
- If tariffs apply, who is responsible for paying them? Note that the normal default position is that the importer is generally expected to pay (unless otherwise agreed e.g. the EU supplier has agreed to supply on DDP (Delivery Duty Paid) terms). Tariffs could be payable where the goods do not meet the origin requirements under the UK-EU trade deal – see Question 12.
- Are suppliers free to raise prices in response to Brexit-related changes? Note that many contracts on supplier-favourable terms are likely to provide that any increased cost of performance due to changes in the law can be passed on to customers.
- If suppliers cannot deliver goods on time owing to Brexit-related disruption, what options do I have? Am I free to source goods elsewhere? What termination rights do I have?
- Will I be able to recover any loss suffered as a result of Brexit-related disruption? Force majeure and material adverse change clauses may be key considerations here – see this briefing.
Make sure you have thought through the implications of choosing a particular Incoterm – for example, EXW and DDP may raise issues relating to VAT treatment.
UK businesses which export goods to the EU should review contracts with key customers with a view to answering the following questions:
- Who will be responsible for compliance with customs formalities and other additional red tape (and who will bear the cost)? See discussion of Incoterms below and note in particular the VAT implications of using certain Incoterms.
- Does the contract allow you to pass on increases in cost to your customer?
- If tariffs apply, who is responsible for paying them? Note that the normal default position is that the importer is generally expected to pay (unless otherwise agreed e.g. you have agreed to supply on DDP (Delivery Duty Paid) terms). Tariffs could be payable where the goods do not meet the origin requirements under the UK-EU trade deal – see Question 12.
- Are you required to deliver by a particular deadline and is this likely to be achievable if there is Brexit-related disruption? Consider whether you should seek a variation to allow for greater flexibility.
- If you are unable to meet your contractual obligations, what is your exposure? Can the customer buy elsewhere or terminate? Are you likely to be liable for any loss it has suffered? Force majeure and material adverse change clauses may be key considerations here – see this briefing.
Incoterms are standard provisions drawn up by the International Chamber of Commerce (ICC) for use in contracts relating to international trade in goods. They are not obligatory but they are widely used in practice. The Incoterms which your business currently uses are likely to need review because they may no longer be appropriate after the end of the transition period. For example, they may make your business responsible for customs formalities and payment of tariffs. Neither of these was a major issue while the UK remained in the EU Single Market and Customs Union, but from 1 January 2021, you could be left exposed to significant additional costs and compliance burdens – and in a worst case scenario, the allocation of responsibility may mean that you cannot meet your contractual obligations. Certain Incoterms also have implications for the VAT position – see Question 11. For more information on Incoterms, see this briefing.
For more guidance, see:
- Brexit: the impact on contracts; and
- In the know: developments in contract law and practice in 2020 – this webinar includes discussion of Brexit and force majeure/material adverse change clauses, how contracts can help to mitigate the risk of goods shortages and Incoterms.
How does VAT apply and what changes should I make?
Import VAT will be payable but businesses should be able to avoid having to pay this "upfront" (i.e. at the point of import) by using postponed accounting (in the case of VAT-registered businesses). This means accounting for import VAT in their normal VAT return rather than paying it upfront, which avoids:
- the potential cashflow hit of having to pay import VAT at the point of import; and
- additional VAT administration (since import VAT can be dealt with through the VAT return which most businesses have to complete anyway).
Bear in mind, however, that VAT issues may have also implications for the terms on which you are able to contract with EU suppliers (see textbox).
REQUIRING SUPPLIERS TO CONTRACT ON DDP TERMS
If you typically ask your EU suppliers to contract using the DDP (Delivery Duty Paid) Incoterm, you may find that they will be resistant to this in relation to goods to be delivered after the end of the transition period. This is because, for VAT purposes, it may be regarded as a supply in the UK – in which case the EU supplier may be expected to register and account for VAT in the UK. It may not want the compliance and administrative burden of doing so. For more information on Incoterms, see this briefing.
Exporters and UK VAT
Exports to the EU are zero-rated for UK VAT purposes, but in order to benefit from this treatment, exporters will need to prove that the goods have in fact been exported (and have left the UK). Typically, such evidence will consist of a "Goods Departed Message" generated by the UK's customs IT system when goods leave the country. In the absence of a Goods Departed Message, authenticated copies of transport documentation may also be acceptable. It is therefore essential to keep records of these documents – see Question 13.
EXPORTING TO THE EU ON EXW TERMS
If you plan on using the EXW Incoterm (which is generally regarded as the most favourable to the supplier/exporter), note that it does not require a buyer to provide you with the Goods Departed Message, which would typically only be received by them. Without such evidence, HMRC may not accept that the goods should be zero-rated for VAT in the UK. As a result, it is important to ensure that that the contract includes an obligation on the buyer to provide you with a copy of the Goods Departed Message and/or authenticated copies of transport documentation. If you have the requisite bargaining power, you may also be able to demand that buyers pay a deposit equal to the amount of VAT you may be liable to pay if you cannot demonstrate that the goods were exported (the deposit would be refunded if the buyer provides the necessary evidence). For more information on Incoterms, see this briefing.
Exporters and VAT in EU Member States
Another issue facing exporters to the EU will be where customers insist that you continue to deliver on DDP terms after the Brexit transition period. For VAT purposes, this may be regarded as a supply in the customer's country - in which case it is expected that you will be required to register and account for VAT in that country. To prevent this, where possible, you should try to agree to Incoterms which make the buyer responsible for import clearance and import VAT. For more information on Incoterms, see this briefing.
Do I need to be concerned about proof of origin?
In order to demonstrate that goods qualify for preferential tariff treatment under the UK-EU trade deal agreed in December 2020, it will be necessary to show that they originate in the EU or the UK (as the case may be). The requirement for proof of origin is designed to prevent, for example, a UK business importing goods from China and then seeking to take advantage of an EU-UK trade agreement to export them to the EU (thus avoiding the tariffs which the EU would normally apply to goods of that type produced in China). As those goods did not originate in the UK, they will not be eligible for lower/zero tariffs if they are subsequently exported to the EU. If the goods underwent some additional manufacturing process in the UK, that could be sufficient to make them "UK goods" for origin purposes – but much will depend on the extent of that process and the value it adds to the goods.
What does the UK-EU trade deal say about proof of origin?
Under the Trade and Cooperation Agreement (TCA) signed by the UK and the EU in December 2020, the most straightforward way to prove origin is to present a declaration from the supplier that the goods meet the relevant requirements. These requirements are set out in some detail in the TCA itself, as is a template for the supplier declaration. The declaration can be included on the invoice or other related documentation accompanying the goods, provided there is sufficient information to identify the goods to which it relates. Suppliers can also provide a long term declaration which will cover multiple shipments, which may help to simplify the relevant paperwork. However, suppliers will also be expected to maintain internal records which support their assertion (in the declaration) that origin requirements were met. For example, the records will need to show that, if third country components were used in manufacturing the finished product, those inputs did not exceed certain thresholds for third country content.
Proof of origin can also be established based on the "importer's knowledge". However, this is likely to be less straightforward as it will generally mean that the importer must have carried out due diligence on the supplier's manufacturing process in order to satisfy itself that relevant origin requirements are met. The importer will also be expected to be able to produce records to support this. See further below for discussion of what the TCA says about cumulation of origin (i.e. where the finished goods contain a combination of UK and EU inputs). Cumulation, though potentially helpful in avoiding tariffs, adds further complexity when it comes to establishing proof of origin.
WHAT IMPORTERS AND EXPORTERS NEED TO DO
- Importers: check that your suppliers can provide (i) the necessary documentation to secure preferential tariff treatment (otherwise you will be at risk of having to pay tariffs on the goods); and (ii) adequate records to back up any claim to preferential tariffs on the basis of origin (if any queries are raised). EU suppliers will not be used to doing this for the UK, as proof of origin is not generally relevant to goods trade within the EU Single Market and Customs Union. That said, if those same suppliers export to the rest of the world, they are more likely to have experience of similar requirements and should find it easier to comply.
- Exporters: although tariffs are normally payable by the importer, this does not mean that you can "wash your hands of the problem", especially where a trade agreement is in place. In that case, your customer is likely to expect you to provide proof of origin so that they can claim preferential tariff treatment and achieve cost savings. You should therefore be prepared to provide the necessary documentation and ensure that you keep adequate records to back it up, should any queries be raised.
What if proof of origin is difficult or impossible to provide?
There may be situations where the extra cost and administrative burden of proving origin outweighs the benefit of any reduction in tariffs that could be obtained. This may be the case for products where the applicable tariff is relatively low. Indeed, academic studies have shown that proof of origin requirements sometimes lead to businesses deciding not to bother taking advantage of preferential tariff treatment provided for in free trade agreements. This should be borne in mind when deciding how to approach proof of origin; some businesses may decide that given the major changes they are being required to make elsewhere (and the additional pressures of COVID-19), it should not be treated as a top priority. However, where the tariff which would otherwise be payable is more substantial, they may have no choice but to address the issue.
"LATE" PROOF OF ORIGIN CLAIMS
In some cases, tariffs may have to be paid simply because it has not been possible to provide proof of origin at the time of import (e.g. because the supplier is not used to dealing with proof of origin and failed to supply the correct documentation). However, if this happens, all is not lost, because the TCA allows the tariffs to be reclaimed provided that the requisite proof of origin is supplied within 3 years of the date of importation (or such longer period as may be permitted by the EU or the UK, as the case may be).
Cumulation of origin
The TCA allows for so-called cumulation of origin. This means that if, for example, a UK exporter needs to make use of components produced in the EU, those components can be regarded as coming from the UK for the purpose of the origin rules in the TCA. For example, let's say that 80% of the components in the finished product come from the EU. Without cumulation, this might mean that the finished product could not be regarded as originating in the UK because too much of it has been manufactured elsewhere (and insufficient processing/assembly has taken place in the UK). However, with cumulation, the EU components are treated as if they originated in the UK, with the result that the finished product can, after all, qualify for preferential (zero tariff) treatment under the TCA.
Whilst this is helpful in terms of avoiding tariffs, it adds further complexity when it comes to establishing proof of origin. In particular, where the UK manufacturer is expected to supply its EU customers with an origin declaration, it must have a declaration from its own EU component suppliers to prove that the components did indeed originate in the EU. However, there is a "grace period" of 1 year in relation to this requirement i.e. until 31 December 2021, manufacturers will not be expected to have supplier declarations in place (although they will be expected to be "confident that the goods do meet the TCA preferential rules of origin").
What records should be kept and why?
Keeping good records of customs declarations and related paperwork is likely to make it easier to benefit from streamlined customs procedures designed to reduce red tape, both now and in the future (eligibility for such procedures is usually dependent on demonstrating a good compliance record). There are also a number of other reasons why good record keeping is important for both importers and exporters (including legal obligations):
Importers are required by HMRC to keep records relevant to VAT for 6 years and records of all traded goods declared to HMRC (e.g. import declarations) for 4 years. All VAT registered businesses will also continue to be required to submit monthly Intrastat arrivals declarations for statistical purposes; a 6 year archiving requirement applies to this.
Records should also be kept of any documentation provided by suppliers to demonstrate that the goods originated in the EU (and therefore qualified for preferential tariff treatment on entry into the UK – see Question 12). These should also be kept for 4 years.
Review your approach to record keeping to ensure that it will remain fit for purpose after 1 January 2021.
For exporters, it is strongly advisable to keep the following:
- Proof of export e.g. the Goods Departure Message generated by the UK National Export Service system – without such evidence, HMRC may not accept that the goods should be zero-rated for VAT purposes (see Question 11).
- Appropriate records to demonstrate that the goods originated in the UK (and can therefore qualify for preferential tariff treatment on entry into the EU – see Question 12). The UK-EU trade deal requires these to be kept for a minimum of 4 years.
How do I prove that products comply with relevant standards?
Customs authorities will want to be satisfied that goods being imported (whether into the EU or the UK) meet relevant product standards. The approach to this varies considerably depending on the perceived risk posed by the goods in question.
For example, as noted earlier, most agri-food products must enter through a Border Control Post (UK) or Border Inspection Post (EU) and will undergo a physical inspection. In some cases, they may need to be accompanied by an export health certificate.
In other cases, where the products are regarded as lower risk, there is no requirement for physical inspection (although customs authorities will have the power to do so and may undertake spot checks on a certain percentage of consignments). However, goods must be appropriately labelled and must usually be accompanied by a certificate confirming that they meet relevant standards.
With products at the lower end of the risk spectrum, that certificate may simply be a statement in a prescribed form confirming that the manufacturer has self-certified compliance with the relevant standards. With more highly regulated products such as medicines or chemicals, the accompanying documentation will usually need to indicate that an appropriate third party has been involved in testing or approving the product – which may have particular implications for UK exporters (see further below).
The main change is that goods will need to be accompanied by documentation certifying compliance with relevant standards. In most cases, this should not be difficult to produce but businesses will not be used to doing so in relation to UK-EU trade.
What importers need to do
- Find out whether the products you import into the UK are likely to be subject to physical checks. If the answer is "yes", this is likely to make them more vulnerable to delays as new infrastructure for physical checks may not be sufficient to meet demand. This will make it all the more important to review contractual obligations (see Question 10) and consider mitigation strategies (see Question 7).
- Check that your suppliers can provide the necessary documentation to demonstrate compliance with applicable standards in the UK (and which will need to accompany the goods). As these standards are not changing in the short term, they should be consistent with the EU's standards. It should not therefore be difficult for EU suppliers to provide the relevant documentation – but they may not be used to doing so, as it is not necessary for trade within the Single Market and the Customs Union. It should also be noted that any certificate/declaration of conformity should refer to the British Standard (e.g. BS EN 60335-1:2012) rather than the European standard (eg. EN 60335-1:2012), even though they have the same substantive requirements (and in most cases the difference is a mere two letters in the reference to the standard).
- As regards labelling, the UK is introducing its own "UKCA" mark to replace the "CE" mark. However, there will be a transition period of one year during which the "CE" mark will continue to be recognised in the UK, although there are some exceptions – see this briefing for more detail. As a result, in most cases, no immediate action is required in order to be ready for 1 January 2021 - but EU suppliers will obviously need to change their labelling in time for 1 January 2022 (and you should make sure they are aware of this requirement).
What exporters need to do
- Find out whether the products you export to the EU are likely to be subject to physical checks. If the answer is "yes", this is likely to make them more vulnerable to delays as new infrastructure for physical checks may not be sufficient to meet demand. This will make it all the more important to review contractual obligations, especially if you typically supply your customers based on Incoterms which make you responsible for customs clearance and other border formalities on entry to the EU (see Question 10).
- Make sure that you can provide the necessary documentation to demonstrate compliance with applicable standards in the EU (and which will need to accompany the goods); even if you are not responsible for clearing the goods through EU customs, your customers will expect you to be able to provide this documentation so that they can secure clearance. As the UK's standards are currently identical to those of the EU, this should not present insurmountable problems so far as most products are concerned – although see textbox below as regards third party certification, where you may need to make some changes in order to be able to continue exporting to the EU.
- As regards labelling, you should continue to apply the CE mark to products as in the past. Once again though, note the points made in the textbox below about third party certification.
THIRD PARTY CERTIFICATION: WHAT'S THE ISSUE?
Certain more highly regulated products, such as medical devices, require approvals from "notified bodies" in the EU. After 1 January 2021, it will not be possible to rely on product approvals originally obtained from notified bodies based in the UK for any products placed on the market in the EU. However, it is possible to transfer your existing approval to a notified body in the EU (we recommend discussing this with your UK notified body in the first instance – they may have arrangements in place to facilitate this). If this is not possible, you will need to seek a fresh approval from a notified body in the EU (which is likely to be time-consuming and expensive). Similar issues arise with chemicals under the EU's REACH regime, although in this area the regulatory framework may give rise to further complications.
Note also that for medical devices and in vitro diagnostic medical devices, cosmetics and marine equipment, there is a requirement for non-EU suppliers to appoint an authorised representative in the EU, whose existence must be noted on the product labelling (similarly, from 1 January 2021, non-EU suppliers will no longer be able to rely on an authorised representative based in the UK to fulfil this requirement). For other products, appointment of an authorised representative is voluntary and not a precondition for exporting to the EU.
What's the risk if the correct documentation isn't provided?
If the relevant paperwork is wrong, then as outlined in Question 4, the risk is that goods may be delayed at the border. Our view is that UK authorities are unlikely to see it as a major enforcement priority in the first half of next year, particularly given the extra workload involved in introducing new border processes. However, that could change if evidence emerges that products which do not meet UK standards are finding their way onto the UK market. As regards the EU, as outlined in Question 1, the approach to enforcement may depend on whether a trade deal has been agreed. In a no deal scenario, there will be less incentive for the EU to take a relatively lenient approach to enforcement.