How the EU-UK Trade and Cooperation Agreement Impacts Business

The EU-UK Trade and Cooperation Agreement (TCA) is now incorporated into U.K. law and is being applied by the EU on a provisional basis until February 28, 2021 as it is yet to be ratified in the European Parliament.

Businesses, and in some cases tax authorities, are now working to understand what the TCA will mean on a practical basis; there are several key areas that need to be considered, both in respect of the agreement itself and also the wider value-added tax (VAT) implications of the U.K. being a third country in the eyes of the EU.

The TCA runs to 1,246 pages but there is actually very little on VAT, as the VAT position of trade between the U.K. and the EU was largely known before the agreement was signed. What the TCA does, however, is put in place a Protocol in respect of administrative cooperation, combating fraud and mutual recovery of taxes and duties. These provisions will give tax authorities within the EU the ability to recover VAT debts cross border and exchange information in much the same way as previously under the Mutual Assistance Recovery Directive.

Fiscal Representation Counsel

One consequence of the Protocol is the potential to impact the requirement for U.K. companies to appoint a fiscal representative in those countries where it is required. Tax authorities may consider that they have sufficient protection on recovery of debts to remove the necessity for a local representative to be held jointly liable.

It is perhaps surprising that this issue has not yet been resolved, but the decision as to whether a fiscal representative is required is down to each EU member state. This is why not all countries require a fiscal representative to be appointed in the first place.

Countries where the TCA is required are considering their position, so announcements may be made in due course. However, it should be noted that Norway has a similar agreement to the TCA and many EU member states still require a fiscal representative to be appointed for Norwegian companies.

Until a member state has formally removed the obligation, it is recommended that businesses go ahead in appointing a fiscal representative where required. Tax authorities can impose penalties for not trading compliantly and it may not be possible to submit VAT returns, which can create further liabilities.

Goods and Customs Duty

Relationships with customers are the most crucial part of any business—if customers are not happy with a business’s offering, they will find an alternative supplier who can give them what they want. In some cases, this will relate to the product itself, but it can also concern the buying experience and what barriers there are in the way of receiving the goods.

The dual concepts of the single market and customs union meant that barriers prior to Brexit were at a minimum. This is no longer necessarily the case and as a result, many businesses held proactive discussions with their customers prior to the end of the transition period to set out their working relationship post Brexit.

In some cases, this has resulted in the supplier having to import goods into the EU, as the customer saw this as a burden. Within some member states, this leads to the supplier having to register for VAT but, as is often the case with VAT in the EU, the position varies between countries, so consideration of the local rules is key. In other cases, the customer was happy to import the goods, especially if there was no customs duty payable.

If no such discussions with customers as described above were held, it is essential that these are carried out as soon as possible to prevent customers taking their business elsewhere. Even if discussions were held, they should be revisited regularly to ensure the customer remains happy with the arrangements.

There are many solutions and strategies which are available to minimize the burden of suppliers having to import into the EU to provide the customer with a similar experience to that which existed prior to January 1, 2021.

VAT Compliance

Finally, many businesses will have rightly focused on ensuring that goods can actually reach their customers; the customs border between the U.K. and EU makes that a necessity. However, that is not the end of the story, as ensuring VAT compliance once the goods are in the EU is essential. This involves consideration of when a VAT registration is required, which brings in the issue of fiscal representation. And, if no VAT registration is permitted, the issue arises of how to recover any VAT incurred.

Failure to consider these issues can result in deals not delivering the expected level of profitability and ongoing exposure to penalties and interest for being non-compliant. Any business wanting to successfully trade in goods between the U.K. and the EU will have to ensure they keep a close eye on the VAT rules that apply to their transactions and crucially, the impact on their customers.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Andy Spencer is Director, Consulting Services, with Sovos.

The author may be contacted at: andy.spencer@sovos.com