Changed Terms of Trade and Disruption
Brexit would change fundamentally the terms on which trade is undertaken between the United Kingdom and Ireland. There are several important aspects of the post-Brexit environment that are very detrimental to free-trade and are likely to make many businesses which are now economic and sustainable, unsustainable or to cause contraction and job losses.
Customs processes and tariffs are commonly identified as the most immediate disruptive effect of Brexit. By themselves they will cause costs and delays on a number of levels.There will be new processes on every movement of goods across the border between the UK and Ireland. Both an export declaration in one state and import declaration in the other state will be required for each movement. In theory each consignment of goods is physically presented to customs for clearance. In practice, most consignments are cleared to proceed without being checked.
it is possible to make prior export and import declarations to the Irish Revenue and the UK revenue authority (HMRC) as the case may be, which may be accepted provided the requisite information is included. The declarations may be made by the freight forwarder, carrier, by a customs broker or by the business itself. Completion of the form is a somewhat complex but with repetition can be completed inside 10 to 15 minutes or less.
The costs of using an external provider such as the freight forwarder or carrier would average €40-€60 per declaration with an average of approximately €100 for the two declarations required for each movement. Businesses may be able to do the declarations themselves. They will incur fees in acquiring and licensing software to make the return and will occur in house costs in training up personnel to make declarations.
In addition, putting the customs information together will involve time and resources. Stock management systems and processes may need to change. Making customs declarations in-house still require some element of liaison with the carrier and freight forwarder and increase costs on the latter’s part, are unlikely to be avoided. Carriers will take on further responsibilities regardless of whether they provide the customs declaration service. They will be required to give detailed (or much more detailed) manifests of all goods within their ferry’s aeroplanes or vehicles.
In the event of a hard Brexit, tariffs will apply to many goods. For most non-agricultural goods the rates are between zero and 10%. The broad average rates under the tariff are of the order of 12% on clothing, 6 to 7% on textiles, 4% on chemicals, 2.5% on electrical machinery 2% and slightly less on non-electrical machinery.
The UK has waived tariffs on a very wide range of goods under the temporary tariff regime effectively providing a zero rate on most (87% by value) of non-agricultural products. Some products are not subject to reduced rates including, in particular some textiles and vehicles This this has been announced to apply at least for a period in the event of a hard Brexit.
Checking and Interventions
In addition to undertaking the tax returns on each occasion that goods move across the border, to both Irish Revenue and UK HMRC basic customs policing requires that a percentage of all goods are checked to see that what is declared corresponds with what is moved over the border. Even in an environment where Revenue and HMRC fully trust most traders, a percentage of all cases must be checked on a random or risk-assessed basis.
Although the single administrative document returned electronically to both Revenue and HMRC may be accepted by message from each authority the final notice which may give a clear green routing on both sides allowing movement through the border, an orange routing in one or other side requiring a documentary check or red routing on one or other side requiring physical inspection will not issue until close to the time the goods actually arrive at the border.
The final routing decision on the import side is likely to issue within the hour before (e.g. the ferry docks). Revenue or HMRC make the final decision shortly after the actual arrival is notified. A similar arrangement would apply to the land border, and default customs rules would mean that final green routing would come through only shortly before crossing the border, after notification of the movement has been given.
Revenue and HMRC do not administer customs only in this context but are also agents for a variety of other departments and agencies in relation to such things as product standards dangerous goods, chemicals and a range of other goods and products that are subject to particular controls and regulations. Intervention may be required for policing of regulation and compliance. As set out below, this arises most dramatically in the case of food and agricultural products where in some cases most or all products need to be subject to a documentary and/or physical inspection
The existing EU single systems in certain areas such as dangerous goods hazardous goods and chemically goods would cease to apply to the United Kingdom so that more complicated processes will arise. Individual consent may be required from the authorities in the UK for movement of goods that were not formally required but issued on a single EU wide basis.
In a longer-term Brexit, where it is distinctly likely that there will be a free-trade agreement with zero tariffs on most goods, customs processes, costs and controls will still exist. In addition, a further significant complication would arise in obtaining certification of proof of the origin of goods in order to take advantage of the zero tariffs under the EU UK trade agreement.
Although there are simplifications based on a rational risk management basis, the default provision is that certification must be applied for either on an ongoing basis or frequently to a governmental authority or trade body, based on evidence furnished for a certificate. This may require a specific or repeated application.
A certain percentage of movements will be checked because the Revenue’s or HMRC’s risk analysis in relation to the movement requires it.A further consideration, as if the above complications were not enough, is that in the early days of a hard Brexit scenario most participants in trade the Revenue at HMRC will be on a very steep learning curve. Errors by traders or even by other traders, in the case of a truck with numerous consignments, are likely to lead to delays.
Most movements of goods between Ireland and the United Kingdom by small to medium-sized enterprises are of relatively small consignments ranging from large parcels to one or a few pallets. In most cases the goods with the grouped of packed with many other consignments in a single vehicle. Revenue intervention and inspection of any part of the merchandise may mean delays for everyone involved.
The possibility of delays at the border is obvious. A certain percentage of movements will be checked because the Revenue’s or HMRC’s risk analysis in relation to the movement requires it. Other checks will be undertaken on a more random, but systematic basis.
The cumulative effect of even small delays and movements can quickly cause inordinate delays. The costs of delays are multiple and may have knock-on effects. The very uncertainty and possibility of delays in themselves is a disruptive factor in itself.
The prospective loss caused by delays whether cars by direct checks by Revenue at HMRC or by checks to others to business is even more significant than might first appear. If goods are checked by Revenue at HMRC the default position is that this is done at the trader’s expense. This may involve incurring additional expenses with the carrier, ferry operator or the port authority. Where the carrier is delayed due to customs intervention the cost will be passed back directly to the particular trader or to all traders. .
Fees to Deal with Queries
Although the cost of making customs declarations may be relatively modest and quantifiable, Revenue interventions may require customs services whether provided by the freight forwarder, or another customs agent to deal with the particular issues raised by Revenue or HMRC. Although a light-touch approach may be taken in the early days of a hard Brexit, there is no guarantee. HMRC and Revenue officials may often have a significant element of discretion.
Customs is a tax and issues may arise ranging from those which are readily resolved to complex points of customs law and interpretation which requires advice and assistance, Customs service providers will be stretched and may be in a position to demand a premium for fees. The fact that the Revenue or HMRC intervention proves ultimately to be unjustified and that queries could be easily answered does not mean that it must pay the cost of whatever delay ice and consequences that arise by reason of the intervention.
Knock On Effects
Delays at the border may have other knock-on consequences. It may cause the seller to be in breach of his contract for the delivery of the goods at a particular time. The default Sale of Goods Act position is that goods must be delivered at the agreed time. It is presumed that the buyer has the right to cancel the contract, buy the goods elsewhere and be compensated for the loss. In the case of a standing arrangement for ongoing supply, one or a number of failures to deliver on time may enable the customer to cancel the entire contract.
Additional personnel costs will arise for carriers and traders. If there are delays at or near the border this will involve prolonged hours worked by drivers and others. The EU rules on driving hours in the road transport sector are strict. Where the movement is longer than planned, a second driver or a compulsory rest period may be required.
In the case of non-Irish non-UK driver’s immigration issues may arise. Driver licence recognition issues may arise This may limit the pool of drivers available. Road transport operation licences operate in the EU single market so that the operator may not be able to undertake road transport business in the United Kingdom thereby making its entire model uneconomic or more expensive.
Limited Experience of Roll On Roll off Customs
The roll-on, roll-off ferry customs process and the land border customs process are largely outside the experience of even the most experience of Irish Revenue, HMRC and most customs agents and customer service providers in Ireland and the UK. Almost all customs movements at present take place via deep-sea container traffic or movements by air from outside the European Union. In the former case, the containers arrive in Ireland or the United Kingdom and are cleared through Irish or UK customs only. Customs on the other exporting side will have been undertaken by an exporter in that state.
The principal land border movements in Western Europe are with Norway and Switzerland. Despite ongoing development and customs cooperation, there are significant physical obstacles at the border which have been well documented in the media in recent times. This is despite the fact that Norway is in the EEA and part of the EU single market and Switzerland’s is in EFTA and party to many agreements equivalent to the EEA, including for free movement of people and the alignment of many trading rules with the EU.
The position is even more complicated at the Turkish border. Turkey is in a customs union with European Union but is not part of the single market. Despite the customs union there are considerable delays at the border checking both compliance with single market rules in respect of goods and also drivers’ licenses certificate of professional competence and the vehicle operators’ credentials.
Food and Agriculture
The position is very much worse in respect of food and agricultural goods. Much higher tariff rates apply to imports of agricultural goods. For example, the third country rate on EU imports is between 20 and 60% on various types of dairy products, with an average of 22% on cereals, 18% and animal products. The tariff rates on many foods are between 10 and 18%.
The UK temporary tariff regime has reduced these rates to some extent for imports into the UK, but relatively high rates continue to apply in some cases. The tariff calculations are complex as many agricultural products are subject to quotas and weight-based tariffs.
In the case of agriculture and food documentary checks and physical checks are required in a very high percentage of cases. The percentage depends on the particular animal or food type with 100% documentary checks required in many cases. These checks are to take place at border inspection points. The physical checks are certain to cause significant delays.
Requirement for Establishment on Both Sides
As if all of the above factors were not enough to cause trade friction, even more fundamental considerations may arise in many cases, in the distribution of goods from Ireland to the United Kingdom and the United Kingdom to Ireland.
The EU customs code and the new UK customs code which effectively replicates it, requires that a business which makes declarations whether export or import declarations, must be established within that jurisdiction. This requires a presence such as a company or a branch in the other state which acts as the importer of record.
An Irish exporter may be in a position to complete export declarations with Irish Revenue. Revenue may accept his declaration. An exit notice must be given in the declaration or at before approaching the border. In most cases, Revenue will not intervene, although some policing and verification will be required to vouch that the goods which have been declared in fact correspond with those that are crossing the border.
However, in order to achieve a free “straight-through” the port roll on roll off movement to the UK, there must also be a UK established importer who makes a UK import declaration, paying or securing the VAT, any customs duty or other requirements that apply. This must be done in advance so that the lorry can move out to Irish export customs control and in true UK export customs control.
This presupposes that the customer has the ability and can take on this process, from a costs perspective. There will be many cases where the UK buyer is prepared to act as the importer of record. It may have no alternative. However, where there are alternatives, it may be more convenient and efficient to take them. The Irish exporter may find that its business can no longer compete on the new terms.
A subsidiary or permanent establishment means having a sufficient presence to effectively act as importer and distributor. The subsidiary or permanent establishment of a branch would itself be subject to UK corporation tax on its profits. It would have to have a registered office and at least a sufficient presence to comply with its companies, tax and other regulatory obligations. A guarantee would be required, in the short term, although a period of grace may be afforded for a short period.
An alternative is that an agent takes full customs responsibility. Unsurprisingly most agents do not wish to take on actual responsibility for the trader’s tax liability. There are some limited exceptions such as postal consignments for which there is a special regime. Parcel carriers, may effectively act as a customs agent, may be willing to act as agents, on lower risk and small value subject to having complete assurance by way of appropriate security.
In consumer cases, postal arrangements or parcel carriers may be willing to act as agent for the importer. However additional costs will arise. For other businesses the only way to ensure continuity of supply if the buyer is unable or unwilling to undertake customs processes is to sell through a UK established distributor or establish a UK subsidiary or permanent establishment. Needless to say, this involves additional costs and resources, which may not be feasible and economical.
A Hard Brexit would change the VAT position. The existing VAT information exchange system which facilitates the sale of goods and supply of services within the EU on an integrated and smooth basis will cease to apply.
In business to business sales VAT will arise immediately at the point of import whether into the United Kingdom or Ireland. Ireland and the United Kingdom have announced a deferred VAT scheme, by which the date for payment of VAT be deferred until the next VAT date.
The usual guarantee that would be required in the circumstances in order to defer VAT may not be required for a period. However, the guarantee would be required, A guarantee requires either a cash bond or effectively, a facility from an established credit institution up to the maximum liability that is required by the customs rules.
In the case of Irish businesses selling to consumers in the UK they will be required to register for UK VAT, collect and pay it to UK Revenue HMRC) in most cases. The existing EU arrangements by which Irish VAT might be charged within certain thresholds by distance sellers would no longer apply.
The above requirements on an Ireland to UK export, apply equally and with greater force to a UK to Ireland import. The UK has granted some no-deal Brexit concessions for imports. Ireland is not in a position to grant equivalent concessions, as it is bound by EU customs rules These can only be changed by amending EU law.
Businesses which import face the above position in reverse in their purchases from the UK. Although they may act as importer in Ireland, some entity must also act as an exporter in the UK, making the export declaration and exit notice to the UK Revenue (HMRC). IN the same way the tow notice must be coordinated in the same way, to ensure free movement from the UK to Ireland. This will generally require the freight forwarder or carrier to complete return on both sides as agent of the exporter and importer or one or both of them, in liaison with the carrier, undertaking their own respective returns.
Single Market Affects Goods Movements Too
The above customs requirements do not fully describe the direct impediments to the import of goods which Brexit will cause. Many goods are regulated under EU wide rules. These rules will cease to recognise UK certifications in many sectors. Equally, the EU certificate will not be recognised in the UK, although a period of grace has been proposed on the UK site.
Produce will need to ensure that goods are certified for the standards in the other jurisdiction. The importer will assume greater responsibilities, including increased responsibility for product liability.
The current EU UK rulebooks will be, literally torn up and replaced by an entirely new regime overnight by which the UK has the status of an entirely external country to the EU. Even the above profound disruption, does not fully describe the many additional ruptures in rules and arrangements that are taken for granted in particular sectors and settings.
Spiralling Effects and Uncertainty
There would be likely to be many unpredictable economy-wide and sector-wide effects and knock-on effects of a sudden and hard Brexit. There may be a further sudden and unexpected fall in the value of sterling which may make more UK trade unprofitable in the short to medium term.
There would be a general hit to confidence caused by Brexit and by the very distinct possibilities of very substantial job losses. There is likely to be insolvency liquidation downsizing cessation of business of key suppliers and customers across the economy. There are likely to be further unpredictable second third and fourth etc. order effects. Even a handful of the above factors are sufficient to make many lines of trade no longer viable or to cause contraction and job issues.
It may be of course the case that some businesses in Ireland will have the opportunity to serve markets either in Ireland or the EU formerly served by UK firms in the medium to longer term. However, there is likely to be a slow process of adjustment and many firms would not have the working or long-term capital to support a complete reorientation and change in their business model and the customer base.
The third, fourth and fifth order effects of a sudden Brexit are very unpredictable because they involve multiple new scenarios interacting. The very uncertainty in itself and chaos would itself cause a hit to consumer confidence and industrial output.