E-business and Hard Brexit
Please note that the information herein is of a general nature and you should not act or refrain from acting on it without professional advice on the specific facts of your case. No liability is accepted by the author or Sykes Anderson Perry Limited in respect of this article. Law is a complex subject and the above is a basic outline only and is intended only as a general guide. Nothing herein constitutes financial advice.
E-business is inherently vulnerable to Brexit disruption because it is delocalised.
Risks are VAT, Customs Duty, consumer law and enforceability of contracts.
There are dangers are for both UK and EU based businesses.
Enforceability of contracts could be a major problem.
Have a flexible structure so you can adapt quickly to unpredictable events.
Business to business - VAT
Goods you sell to say a German VAT registered businesses within the EU are zero rated for VAT purposes. The VAT registered German business which receives your goods accounts for the VAT in Germany and usually reclaims all the VAT as input tax in Germany. This could change in a hard Brexit with German VAT not being reclaimable either in full or in part. This would put UK exporters at a disadvantage compared with EU suppliers. It means UK businesses will have to reduce their prices to stay competitive in Europe. If you are in a longer term contract this should be considered now so there is a mechanism in the contract to deal with this cost increase.
It is unlikely that the UK will change the zero rating. The changes will be made in the EU where the goods arrive. There will also be more paper work for the EU customer receiving the UK goods.
Tip 1 Run scenarios in which your EU customers’ ability to reclaim input tax on your supplies is either wholly or partly restricted. How much more expensive will this make your goods and how does this compare with what your competitors within the EU charge who will be unaffected.
Tip 2 Speak to customers in EU now and tell them contracts can be varied so you will absorb some/all of any VAT cost increase.
Business to consumer – VAT
Currently you have to charge VAT in the UK when you sell to a person in EU who is not registered for VAT there. If you sell over a certain threshold in any particular EU country then you have to register for VAT and pay VAT there. The threshold is €100,000 in Germany and €35,000 in France. This is useful if you are making low levels of supplies and do not want to register for foreign VAT. This may change in a hard Brexit with the thresholds being lowered. However the administrative costs will be high and this will probably not be a high priority within the EU.
Tip Probably dealing with consumers least risky from VAT point of view.
Triangulation – VAT
This applies if you as a UK company receive an order from Germany and fulfil this order by getting a supplier say in France to deliver the goods direct to the German customer. In this case there is a supply by the French company to you and then a supply on in Germany to the German customer. Technically you would be making supplies in Germany and required to register there for VAT. However if you are registered for VAT in the UK there is a procedure to avoid this. In a hard Brexit scenario this may no longer apply. There may be a requirement for you in this case to register for VAT in Germany where the goods are being supplied.
Tip Think about establishing a supply base within the EU to service EU clients.
This is potentially a big problem. Currently you do not pay Customs Duty on goods moving within the EU. You pay Customs Duty on goods coming into the UK (or EU) from outside the EU. If there is a hard Brexit the EU is likely to impose Customs Duty on goods you send to the EU. Your customers will have to pay this in their country which will effectively increase the costs of your goods sold there. Unlike VAT you cannot reclaim Customs Duty. Business wants the UK and EU to address this urgently.
Tip 1 It is sensible to look now at what Customs Duty you may be subject to in a hard Brexit. You may decide that plans need to be drawn up to reduce sales into the EU and concentrate on other markets.
Tip 2 Speak to customers in EU now and tell them contracts can be varied so you will absorb some/all of any Customs Duty cost increase.
Enforceability of contracts
As the UK is within the EU decisions of the UK courts can be enforced directly in the EU. If someone in the EU owes you money and you obtain a court order from an English court you can enforce it directly throughout the EU. This may well change after Brexit and you may have to obtain a decision of the local court where your debtor is based. This will add cost, delays and unpredictability.
Tip Consider changing your terms and conditions to allow you to obtain judgment in an EU court if there is a hard Brexit and automatic enforcement of judgments no longer applies.
When things are unpredictable the only certain advice is to keep your business structure flexible.
Tip 1 Avoid long term commitments. Do not sign any long term leases of premises when you may need to relocate. Review contracts and see if you need to exercise any break clauses.
Tip 2 Plan for the worst scenario. Have a Plan B ready!
Solicitor-Advocate and Chartered Tax Adviser
Sykes Anderson Perry Limited