Brexit tax: Customs duties

Brexit Insights
Donald-Drysdale By Donald Drysdale for ICAS

1 August 2016

Whatever new trade agreements emerge, Donald Drysdale predicts higher costs for UK businesses and consumers.

Customs union

The EU is not only a single market but also a customs union. There are no customs duties between EU member states. They share common external tariffs with third countries, and the EU has negotiated free trade agreements with some 34 non-EU countries throughout the world.

Following the Brexit vote, the UK will wish to negotiate new free trade agreements – not only with the EU but also with other parts of the world. In the case of the EU, arrangements for the Brexit ‘divorce’ may be amicable or acrimonious. This will have a bearing on our future relationship with the EU, and may also affect the ease with which we can enter into other free trade agreements.

Brexit impact

When Brexit finally takes effect, the UK will probably cease to be part of the EU customs union, just as we are likely to leave the EU VAT area (see Brexit tax: The future of UK VAT). Unless agreement is reached to the contrary, the EU could then be expected to apply customs duties to imports from the UK, making them more expensive and less attractive for EU businesses and consumers. Likewise, the UK might apply customs duties to imports from the EU, adding costs for UK businesses and consumers.

As a country outside the EU customs union, the UK would no longer benefit from the EU’s existing free trade agreements with non-EU countries. Thus they too could be expected to apply customs duties to imports from the UK, and the UK might apply customs duties to imports from them.

Where the benefit of the EU customs union is lost or trading arrangements with third countries are changed, the implications could extend far beyond customs duties alone. Additional customs procedures might be imposed on each occasion goods are exported from one country and then when they are imported to another, adding significant time, complexity and cost for the businesses concerned.

Special arrangements

Theresa May’s new government has indicated its hope that the UK will retain access to the EU single market. For customs duties and VAT, what this might mean in practice remains to be seen.

There are some interesting precedents. Turkey, for example, is not an EU member state but participates in the EU customs union. However, Turkey’s customs union with the EU applies only to goods and not services, and it places Turkey at a disadvantage in many ways.  It certainly doesn’t offer a suitable model for the UK, given our dependence on exporting services.

Norway, Liechtenstein and Iceland are members of the European Free Trade Association (EFTA). They subscribe to the European Economic Area (EEA) agreement with the EU members states, within the EU single market but not the EU customs union. They pay for access to the EU single market without being able to influence its rules, and they share in the free movement of people throughout the EU, so UK supporters of Brexit might not favour such an outcome.

Switzerland too is a member of EFTA, paying for access to the single market and sharing in the free movement of people, but it has a separate bilateral agreement with the EU. It also has an expanding network of other bilateral free trade agreements, currently with some 38 non-EU countries.

The UK’s position

On leaving the EU, the UK will probably cease to be a member of the EU customs union as well as the EU VAT area. However, the precise outcome in each case will depend on negotiations that are yet to take place.

The UK government will be keen to ensure that Brexit brings us the greatest possible benefits. These are likely to include a new trade agreement with the EU, possibly in line with the Prime Minister’s stated aim of retaining access to the single market – although the cost and immigration implications of that may be hard for the UK electorate to swallow.

The government will also be seeking to exploit the UK’s ability, outside the EU, to negotiate free trade agreements with other countries. These are likely to include members of the Commonwealth and the North American Free Trade Agreement (NAFTA).

Free trade agreements can take a long time to negotiate – particularly with compound organisations such as the EU or NAFTA. Furthermore, the UK’s current position as an EU member state hampers our ability to enter into new free trade agreements until Brexit finally takes effect.

Brexit negotiations could be fraught with difficulties. The UK might lose the benefit of free trade within Europe long before new trade arrangements could be agreed with the EU or certain other prospective trading partners. Nonetheless, there are already encouraging signs that constructive preliminary talks are taking place with a variety of non-EU countries.

In a complex situation such as this, there is unlikely to be a sudden switch from EU membership to a plethora of new free trade agreements with the EU and other countries. It is much more probable that new arrangements will evolve gradually over an extended period of time.

This could create significant ongoing uncertainties for UK businesses with overseas suppliers or customers, as they may have to cope not only with changes to customs duty rates but also with multiple changes to customs clearance procedures and business system requirements.

Article supplied by Taxing Words Ltd


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