News
Authors
Thomas Tapp
Project Manager at h&z
Klaus Katzer
Partner at h&z
Shortly before the referendum on 23 June 2016, consultancy h&Z conducted a survey to determine whether and to what extent German companies had prepared themselves for a possible Brexit and with what scenarios they were planning. The result surprised us – the possible Brexit decision did not play a major role for most companies at that time.
In the meantime, two years have passed and there has been no lack of warnings. „Hard Brexit costs machine builders 200 million euros,“ the Faz said last December. „Brexit will hit medium-sized companies particularly hard“, the VDMA said in March. „Trade associations denounce German Brexit carelessness,“ was a headline in Die Welt in mid-July.
But let’s be honest: how seriously did you really take these and other warnings? Didn’t you also hope that things wouldn’t end up that badly in the end? That the negotiators from Brussels and London would ultimately agree on a „soft“ Brexit after all?
Although both sides may reach a mutually acceptable solution, rationally speaking, the probability of a „hard“ Brexit has increased significantly in recent months. Even Michel Barnier, the European Union’s chief Brexit negotiator, considered a no-deal possible in July – a development medium-sized machine and plant manufacturers, as well as their numerous suppliers, have to worry about. The UK is the fifth-largest sales market for the industry; many companies have not only customers on the island, but also suppliers and other important partners. Without an amicable Brexit deal, machine and plant manufacturers in Germany face serious disadvantages. They not only have to fear customs duties, but also technical trade barriers and a lot of bureaucracy.
So what should they do? It is probably already too late to make comprehensive preparations for the worst-case scenario. But there is still time for such businesses to develop a last-minute programme that can at least cushion the worst consequences of a hard break.
Here are ten ad hoc measures that h&z strongly recommends to machine and plant builders:
Hedging not only currency but also customs risks
Many German SMEs hedge against interest rate and exchange rate risks in their dealings with UK companies as the country never belonged to the eurozone. In the course of leaving the EU, however, further imponderables are added, namely the customs risk and the associated danger of higher supplier prices. Companies should also prepare themselves for this situation.
Goods brought into the EU from the UK or intended to be brought out of that customs territory for transport to the UK would be subject to customs supervision. They may also be subject to customs controls.
This means that customs formalities must be completed and customs declarations made.
Customs authorities could also require security to be provided for potential or existing customs debts.
In particular, companies that have not yet required customs clearance should create the organisational and personnel prerequisites for this by, for example, training employees.
Certain goods brought from the UK into the EU or vice versa are subject to certain prohibitions or restrictions in the interests of public policy or public security, the protection of health and life of humans, animals or plants or the protection of national treasures.
European businesses should check whether goods they currently trade with the UK are subject to these restrictions.
Customs simplification authorisations granted by the UKcustoms authorities, such as Authorised Economic Operator (AEO) status authorisations and others, will no longer be valid in the EU customs territory.
Prepare for changes to indirect taxes
Goods brought into the EU from the UK or dispatched or transported from the EU to the UK are treated as imports or exports under Directive 2006/112/EC (also known as the „VAT Directive“). This means that VAT is levied on imports, while exports are exempt.
Taxable persons established in the UK who purchase goods and services or import goods subject to VAT in an EU member state can no longer apply for a refund of this VAT electronically under Directive 2008/9/EC but must apply for a refund under Directive 86/560/EEC. Member states may make refunds under the latter directive, subject to reciprocity.
Companies in the UK could prepare such applications.
A UK resident business carrying out taxable transactions in an EU Member State may be required by that member state to appoint a tax representative in accordance with the VAT directive to deal with EU tax matters on its behalf and to pay the tax.
Businesses should already start looking for suitable tax representatives, such as customs agents.
The movement of goods from the UK to the EU and the dispatch or movement from the EU to the UK are treated as imports or exports of excise goods in accordance with Council Directive 2008/118/EC of 16 December 2008 concerning the general arrangements for excise duty. This means, inter alia, that the Excise Movement and Control System („EMCS“) will no longer apply to the movement of excise goods from the EU to the UK under suspension of excise duty. Instead, these movements are treated as exports where excise control ends at the point of exit from the EU.
The movement of excise goods to the UK will therefore require an export declaration and an electronic administrative document (EVD). The movement of excise goods from the UK to the EU will be subject to customs formalities before it can start under EMCS.
Companies will also have to prepare for these changes in terms of organisation and staff.
Customs duties not only have price effects, they also entail an often underestimated bureaucratic effort. Machine and plant manufacturers must prepare for this scenario. Longer waiting times for imports and exports have to be taken into account and the supply chains have to be changed accordingly. Important: For British carriers, the EU-wide regulations on cabotage no longer apply. Thus, EU based companies may have to look for new service providers based in the EU. In addition, the European-American Open Sky Agreement for British airlines could possibly be repealed in the course of a tough break-up. In this case, new providers would also be needed for air transport.
Obtaining work permits, applying for visas
After a hard Brexit: If you send employees to the UK, nothing works without a residence and work permit and staff may need to apply for visas. The bureaucracy associated with this can lead to significantly higher costs for these assignments.
Review and, if necessary, adjust current contracts
In the course of Brexit, current supply and service contracts can become disadvantageous. Companies should, therefore, consider amending existing contracts now. This may involve, for example, price escalation clauses or fair burden sharing to compensate for additional costs between the contracting parties.
Calculate higher financing costs
Post-Brexit, banks may have to hold more equity when settling transactions via clearing houses. This could narrow the scope for lending, which in turn would lead to higher financing costs for companies.
Consider switching insurance
Anyone who has taken out policies with UK insurers should consider changing their provider. With the withdrawal of Great Britain from the EU, UK insurance companies would no longer be subject to European insurance supervision and no longer participate in the notification procedure.
Observe the abolition of EU investment protection
What could also be omitted is the protection for investors under EU law, which currently also guarantees EU investors in the UK and UK investors in other EU countries freedom from discrimination, market access and freedom of capital movements and payments. As long as there are no bilateral agreements to this effect, companies that have British shareholders or want to attract them, or that want to invest in UK, should also take this point into account.
Disadvantages for companies with a UK entity
The company law recognition for companies registered in the UK will possibly cease after a transitional period. In this case, the companies concerned would be treated as partnerships. This means that current limitations of liability would no longer apply and the shareholders would have to be fully liable. Companies previously audited by UK auditors may have to change supplier.
Considering changes in industrial property right
Existing industrial property rights are to continue to apply for the transition – for new products, however, national industrial property rights must be acquired in UK after Brexit. The CE marking may no longer be granted by UK institutions. German companies that manufacture products in Great Britain but wish to market them in the EU must then ask other bodies to carry out conformity assessments.
Taking into account higher fiscal cost
After the Brexit, imports from UK could be subject to import turnover tax. Although these are deductible, the companies should nevertheless take into account.
