Brexit – One year report card

With the first 12 months of post-Brexit trade under our belts, now is an ideal time to take stock and consider the report card for Brexit. Alistair Duncan, Head of Indirect Tax, looks at which strengths can be highlighted and gives his views on some of the “areas for development” from the last year. 

Economic impact 

With the new trading relationship between the UK and the EU coming into effect at the height of the COVID Pandemic, judging the first year is not straight forward. However, estimates from the Office for Budget Responsibility (OBR) indicate that, in the long run, the decline in trade volumes as a result of Brexit will lead to a 4% reduction in the size of the UK economy.   

Furthermore, the effect of Brexit is not equal across the UK. As a whole, the UK output in the third quarter of 2021 was down 2.1% in comparison with the final quarter of 2019. Whilst some of this may be as a result of the pandemic, the fact that the output for Northern Ireland, which has been largely sheltered from the impact of Brexit by the Northern Irish Protocol, was only down 0.3% in the same period suggests that the largest driver was the impact of Brexit. 

As the economic statistics for the full year are released, the full impact on the UK economy will become clearer. 

Non-Tariff barriers 

At the press conference announcing the agreement of the EU-UK Trade and Co-operation Agreement (TCA), the claim by Boris Johnston on 24 December 2020 that “there will be no non-tariff barriers to trade” raised a few eyebrows. 

As 2021 has shown, this claim is clearly incorrect. Taking the seafood sector as an example, as we discussed in a previous blog, the well documented issues with the movement of seafood and fish products to the EU demonstrated that the repercussions of Brexit included quite significant non-tariff trade barriers. 

However, perhaps the Prime Minister was referring to goods coming from the EU. Although, UK businesses had to deal with the various customs procedures and other controls in relation to goods being exported to the EU; during 2021, the UK delayed the implementation of full border checks on goods arriving from the EU.   

During 2021, most importers of goods from the EU into Great Britain have had the option of delaying submission of the customs declaration to HMRC for up to six months from the point of import. 

Full customs controls were introduced on 1 January 2022 for goods coming from the EU, with the exception of Ireland. However, the government has announced that the current arrangements for goods moving from Ireland and Northern Ireland to Great Britain will be extended for as long as discussions between the UK and EU on the operation of the Northern Ireland Protocol are ongoing. 

Under the TCA, goods moving between the UK and the EU without incurring customs duty provided that it could be demonstrated that the goods were of UK or EU origin. During 2021, HMRC permitted UK exporters to obtain this evidence retrospectively; however, for 2022 onwards, the exporter must hold the relevant supplier declaration to support that the goods are of UK origin at the time the goods are exported. 

As these measures come into effect, it will be interesting to see what impact these will have at the ports and at Border Control Posts. A recent survey by the Federation of Small Businesses indicated that, due to the lack of capacity to process paperwork, the vast majority of small businesses were not ready to submit full customs declarations at the time of import. 

Any delays are likely to increase further from 1 July 2022 as additional measures dealing with health and phytosanitary certification, physical checks on sanitary and phytosanitary goods at Border Control Posts and full safety and security declarations for all imports are introduced. 

International trade deals 

One of the key benefits touted for Brexit was that it would allow the UK to reach trade agreements with other trading partners across the globe. Although a number of trade deals have been announced, it is unclear whether any of these deals offered anything that was not already available within the EU. Following suggestions that the UK would seek to join international trading blocs such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), there was some scepticism around the benefit of joining a Bloc on the other side of the globe as opposed to a customs union with our nearest, and largest, trading partners. 

Labour shortages 

2021 has seen the impact on staff shortages across a number of sectors. The shortage of lorry drivers that worsened the fuel shortages earlier in the year and the reported staffing issues for the hospitality, retail, agriculture and food manufacturing sectors illustrated this in 2021. The departure of an estimated 200,000 EU nationals coupled with tougher immigration rules has exacerbated the position. 

2022 could see additional temporary visa schemes similar to that put in place for the final quarter of 2021 to attempt to ease the lorry driver shortage. In addition, the easing of immigration rules and visa requirements as a “sweetener” in negotiations for trade deals with the countries such as Australia and India may help fill some of the labour shortages.    

Brexit benefits 

Social media has made much of the perceived lack of “Brexit benefits”, with the restoration of imperial weights, crowns on pint glasses and the “blue” passport being listed as the only tangible benefits. 

Whilst Brexit losses such as free movement may be easier to identify; for indirect tax practitioners there have been some clear benefits. These include Postponed Import VAT accounting (PVA), the extension of the scope for “exempt with credit” VAT recovery for the financial services sector and the removal of VAT on sanitary products. 

Prior to Brexit, the cashflow cost of funding import VAT on goods imported from third countries could be significant for UK businesses. To alleviate this, the UK introduced PVA, which allows businesses to account for this VAT on their VAT return. Whilst the new rules result in the status quo for trade with EU suppliers, it is also removes the previous cashflow impact for trade with third countries. 

Prior to 1 January 2021; certain exempt supplies made within the financial services sector to non-EU customers carried an entitlement to input tax recovery. Changes to the VAT legislation resulting from Brexit extended this VAT recovery to all non-UK customers. This change has allowed a number of businesses in the financial services sector to benefit from increased VAT recovery. 

Finally, EU rules stated that member states were required to apply a standard rate of at least 15% and up to two lower rates, no lower than 5%, to certain specified goods or services. In addition, historic derogations allowed member states to continue to apply a zero rate to other goods and services provided that these rates were already in place on 1 January 1991.   

These rules were often touted as the blocker to the introduction of a zero rate on certain products including, most notably, women’s sanitary products (WSP). Exit from the EU has freed the UK from these rules and allowed the zero rate to be applied to WSPs from 1 January 2021. 

On a side note, it should be noted that the EU has been reviewing these restrictions and the Council reached agreement on 1 December 2021 to update these rules. As a result, this particular Brexit benefit may prove to be shorter lived than originally envisaged. 

First year grade 

The report card for the first year of post-Brexit trade is likely to be difficult reading. With very few tangible benefits in sight and a more difficult trading position throughout 2021 as a result of the pandemic, a marker may be tempted to award a C- grade for the first year.  It is certainly difficult to justify anything more! 

If you have any questions or would like to find out more information, please get in touch with Alistair Duncan, Head of Indirect Tax, or your usual AAB contact.