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The Budget and Brexit

For our latest Brexit VAT & Customs commentary, click here.

This is the fifth budget since the UK’s vote for Brexit and, after a number of false starts, it looks like the end game is finally here, write Glenn Reynolds and Richard Cowley of our Indirect Tax team.

As the saying goes familiarity breeds contempt and distance breeds respect.

While Budget 2021 brings a sense of déja-vu and Brexit fatigue has undoubtedly crept in over the years in some quarters, there has been no lack of respect by the Government to the potential damage a no deal Brexit could do to the Irish economy.

As the Minister highlighted in his budget speech, last year’s budget confronted the main challenge faced by Ireland – Brexit. This year’s budget, in the words of the Minister, is “responding to the worst global pandemic in a century”, whilst recognising the continuing need to prepare for Brexit.

The Budget was costed assuming a no deal Brexit, with a no deal anticipated to result in a reduction in Irish growth of just under 3 per cent.

Aside from government continued support measures, which are of vital importance to Irish business and are warmly welcomed, there is limited action the Government can take to change the Customs rules in order to facilitate trade with Great Britain and it was no surprise that customs measures did not feature in Budget 2021.   As in prior years, the main action on Brexit is taking place on foreign shores with ongoing negotiations for a potential free trade agreement which may define Ireland and the EU’s relationship with Great Britain for years to come.  

The knowns and unknowns

There are now less than 75 days to when the Brexit transitional period will cease at 11pm on 31 December 2020. Following this Ireland will enter into a new trading arrangement with the UK, fundamentality different from that which has existed for close on 40 years.  

With this new regime just around the corner there are still some unknowns as to what the trading relationship will look like at the end of the transition period. 

In particular, uncertainty remains on whether a free trade agreement will be entered into and if so, what form it may take.  Sentiment seems to be increasing that a ‘thin deal’ may be reached which may deal with removing tariffs and quotas on some products. However, the extent and scope of this potential arrangement needs to be agreed within a very short and narrowing timeframe.

Whilst there are unknowns, there are also many knowns on the indirect tax side.

We know the VAT and Customs rules and procedures that will apply in Ireland on trading with the UK and business should make sure to familiarise themselves and be able to manage these whether a deal is reached or not.

We know for example:

  • Any arrangement reached with the UK cannot replicate the existing benefits of trading within a customs union and single market
  • The new trading environment will mean the introduction of border controls
  • Customs declarations will be required
  • New regulatory considerations will arise
  • Customs duties will arise on at least some goods traded between the Ireland and Great Britain
  • The VAT rules for trading with Great Britain will change 
  • At least initially, there will be disruption and delays at the borders clearing goods
  • Importantly, there will be no change to the current rules for trading between NI and ROI

The overall impact of these measures is likely to mean increased costs and, as the Revenue Commissioners have highlighted, delays at ports. The idea of frictionless trade east west post Brexit is fiction not fact.

Critically, special rules were agreed as part of the Northern Ireland Protocol such that the trade in goods between the EU and Northern Ireland will, for a minimum of 4 years, stay the same as today. As a result, a hard border between the North and South of Ireland will be avoided.

Is business underestimating Brexit?

Regardless of whether a free trade agreement is agreed before 31 December, trade with Great Britain will become more complex with inevitable delays and increased complexity, at least in the short term, and until a new equilibrium is bedded in and businesses become used to a new way of trading.

Importantly, businesses should be clear that a free trade agreement will not remove the need for border controls and inspections, nor eliminate the need to file customs declarations.

The timeframe to prepare for Brexit is reducing fast. There is legitimate concern businesses may not be ready in time and are underestimating the challenges a new trading regime with the UK will present, even if a deal on a free trade agreement is reached.  

In a recent poll conducted by KPMG during our Brexit webinar series, 74 per cent of respondents said that they had undertaken only basic or no preparations at all.  

It’s never too late

Given the proximity to the end of the transitional period, the ability for most businesses to implement significant restructuring to avoid some of the major disadvantages of Brexit has largely passed.

However, there remains a series of actions that businesses can and will need to take, deal or no deal. 

The actions required for preparing for a deal or no deal scenario are mostly the same from a VAT and Customs perspective. The only difference is a free trade agreement may remove tariffs, but it won’t remove the friction and obligation associated with a new customs border with Great Britain.

With the limited time left the following are the essential actions needed to be ready for a deal or no deal end to the transition period on 31 December.

  1. Make sure you have a customs Economic Operators Registration and Identification (EORI) number.
  2. Review and fully understand the impact on your supply chains, in particular the potential for delays and increased non-tariff costs and how these may be mitigated.
  3. Ensure you have the commodity codes and origin for all goods moving into and out of Great Britain and vice versa. The origin of the goods is a key factor in determining whether tariff elimination may be available if a free trade agreement is reached.
  4.  Of critical importance is to consider how you will file Customs declarations for the export or import of goods. Deal or no deal, declarations will be required.  We expect that most businesses will look to outsource this requirement, at least in the short term. Interestingly, in our Brexit poll, 41 per cent of respondents also flagged they have yet to decide whether to appoint an agent to file their declarations or take the process in house.
  5. Ensure you understand the information needed to file customs declarations and where you will get it. For many businesses the required information is not readily available from existing enterprise resource planning (ERP) / management information systems.
  6. Review the terms of your contracts with your suppliers and customers and assess whether they are adequate for trading post Brexit in a deal or no deal context.
  7. Assess if customs simplifications could help your business.  For example, even if a free trade agreement is reached a special customs procedure called transit will be essential to facilitate efficient movements via the UK landbridge.
  8. Consider holding increased inventory as a buffer against potential delays during the initial Brexit bed in period. 

As Revenue Commissioner Gerry Harrahill said last week, “It’s not too late to start. But time is really short”. 

This article originally appeared in the Business Post and is reproduced here with their kind permission.

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