After being a member of the EU for 47 years, the United Kingdom has formally left the European Union on 31 January 2020, after more than three years of voting to leave. It remains to see what the impact of Brexit on small business will be.
This month, we rounded up the news and examine the probable Brexit impact on businesses. With more than 5 million small and medium enterprises in the UK, the economic effects of a no-deal Brexit can be far-reaching.
What’s Happening Now?
The 21-month transition period has commenced, and trade talks are now taking shape as the British Parliament continues to negotiate the rules of engagement after the divorce.
The challenge remains in how the EU and the UK will strike a deal that will be satisfactory for both parties before the transition period ends in December 2020. While it’s too late for your business to make any proactive short-term adjustments, it’s best to brace for impact.
As it stands, everything will remain business as usual throughout the transition period. However, once the transition period ends, new trade agreements will be in place that will have ramifications on all businesses in the UK. How does all this affect small businesses?
The Potential Impact of Brexit on UK SMEs
In a 2019 study published in the journal Regional Studies, UK SMEs showed that there was a growing concern among businesses, especially those that heavily rely on exports and imports.
In the UK, SMEs account for 99% of all businesses and 60% of the total private sector employment, which makes it the backbone of the economy. Not only do they drive innovation and job creation, they are also important in the country’s productivity growth.
However, SMEs are likely to be significantly affected by political and institutional uncertainty. They are also more likely to be impacted by unpredictable events such as Brexit.
Importing Goods from the EU
If the UK leaves the EU without reaching an agreement on import tax, the imports coming into the country from EU member countries will then be subject to duty and VAT. That is, the VAT treatment for goods coming in from France will be the same as those arriving from the US.
For industries that run “just-in-time” supply chains (i.e., where goods are delivered as they are needed in the manufacturing process), there can be considerable disruptions given the costly delays that will result from the ensuing port bottlenecks. This could affect various sectors such as the car manufacturing industry, pharmaceuticals, agriculture, and so on.
Tariffs on Exports
Another ramification of a no-deal Brexit is that the UK would have to default to the trade terms set by the World Trade Organization (WTO) in January 2021.
As mentioned above, the UK would then have to apply tariffs to goods entering the country from the EU, treating it as it would any goods coming from any other country. The EU would then have to also apply what they call “third-country” tariffs to goods from the UK.
What does this mean? Businesses based in the UK will then have to face additional taxes when they export to the EU market. For instance, the car manufacturing industry would face a 10% tariff on exports to EU member countries, which could cost the industry up to €5.7bn per year. Consequently, this would raise the average price of a car from the UK sold in the EU by about €3,000.
Postponed VAT Accounting After Brexit
Her Majesty’s Revenue and Customs (HMRC) has passed regulations advocating for the use of postponed accounting, which will be implemented on a date to be announced by the Treasury.
EY explains the postponed accounting scheme as follows: “the VAT due at the point of importation can be delayed up to two months until the next VAT return is due.” In other words, the importer does not have to pay import VAT at the time when the goods arrive at a UK port of entry; the VAT payment is deferred.
For more information on the postponed accounting VAT rule, refer to this article from AccountingWeb UK.
Get Dependable Finance and Accounting Support
Navigate the uncertain times ahead with a dependable finance and accounting partner who can help you weather any headwinds in your business. As your outsourced accounting partner, our experts at D&V Philippines are here to help you with management accounting and VAT return preparations.
Learn more about our finance and accounting solutions by reading our whitepaper, Finance and Accounting Solutions for UK CFOs, to find out how we can support your business. Click the link below to get your copy.