Britain is no longer part of the EU VAT area, leading to extra costs for companies exporting to Europe
• Dutch warehouse boom as UK firms forced to invest abroad
• Move to EU to avoid Brexit fees, UK department says
Small British businesses exporting to the EU are struggling to navigate a new VAT regime, with one tax advisory firm receiving up to 200 calls a week from worried companies.
The Federation of Small Businesses (FSB) said its members are facing “significant issues” as a result of leaving the EU VAT area. “Businesses just did not have enough time to prepare for this,” said Selwyn Stein, managing director of VAT IT, a firm that helps reclaim the sales tax. “They’re being hit by a rulebook from 27 separate countries, when they are used to dealing with the EU as a single bloc.
“They are calling us in a panic because their goods have been stopped and they don’t know what to do,” he said. “They have become fearful about trading so are stopping shipments until they have a resolution.”
The UK is no longer part of the single EU VAT area, which means the sales tax is now collected by each country. Bills must be settled upfront by the buyer, with a lack of preparedness on the part of exporters and purchasers resulting in shock demands for payment at the border in recent days.
Many small firms are having to consider registering for VAT in multiple jurisdictions for volumes in sales that are often relatively low, according to the FSB, which said the extra administrative burden could be off-putting.
Phil Ward, managing director of Bristol-based firm Eskimo, which sells designer radiators for up to £4,000, said he is considering moving some of its manufacturing to Poland to stay competitive. Brexit had dealt his business a blow, because the EU accounted for 25%-45% of its sales.
Eskimo has not exported anything so far this year as its main distributor has been unable to find a carrier willing to take the job.“We are the only designer and manufacturer of posh radiators in the UK – everything else is imported from Turkey or Italy,” said Ward, who is concerned it is a “hell of a lot more difficult” for EU buyers to deal with a British company than its main rivals, which are based in Italy.
Leaving the bloc also means UK firms can no longer exploit the VAT triangulation scheme, which makes cross-border trade easier between EU countries.
David Lee, managing director of Torqueflow-Sydex, an engineering company, said it is now charged VAT at 22% on goods manufactured by its Italian sister company, which are then sold to another EU country, because it is a UK entity.
“This is adding 22% on to our costs, which in a competitive market is an absolute killer,” said Lee.
Lee’s company’s options include directing shipments via the UK or registering as a tax entity in every EU country it trades with.
“I’ve been in the industry for over 30 years, working with Australia, Russia and the Middle East – this just makes everything look a joke,” he said.
Event delayed after UK refuses to grant EU ambassador same privileges as other diplomats
An inaugural meeting between the UK’s new head of mission to Brussels and senior EU officials in Brussels has been “postponed” in response to the status of the bloc’s ambassador in London being downgraded.
Lindsay Croisdale-Appleby, who was formally appointed this month to represent the UK in dealings with the EU institutions, was due to meet the chief aide to the European council president, Charles Michel, on Thursday.
The introductory meeting has been “postponed for the time being” by the EU, in what sources said was a tit-for-tat move over a long-running dispute.
Downing Street has been refusing to grant João Vale de Almeida, the EU’s ambassador to the UK, and his 25-strong mission the privileges and immunities afforded to diplomats under the Vienna convention.
The British government’s approach has stirred anger in Brussels as the EU has 142 other delegations around the world, each of which has full diplomatic status.
Hundreds of UK companies could switch operations to countries inside the EU in what is threatening to become a dramatic exodus of investment and jobs caused by Brexit.
The Observer can reveal that since 1 January, 500 businesses – mostly UK-owned, or UK-based with overseas owners – have made inquiries about setting up branches, depots or warehouses in the Netherlands for “Brexit-related reasons”.
If companies switch all or parts of their operations to Europe it will mean the loss of jobs, economic activity and tax revenue at home.
The figures have been compiled by the Netherlands Foreign Investment Agency, which said that while most of the firms were already based in the UK, a minority were new companies from the US and Asia which had investigated a UK move, but had decided against investing here because of Brexit.
Lyne Biewinga, of the Netherlands British Chamber of Commerce, said she and her team had been working “night and day” on inquiries from UK companies in recent weeks.
Meanwhile, in an interview with this newspaper, Austria’s economic affairs minister, Margarete Schramböck, said inquiries from UK companies about moving to her country – which had been high for several years – had increased threefold since 1 January.
In 2019 and 2020, 50 UK-owned or UK-based firms established operations in Austria, according to the Austrian Business Agency. Twenty more had made inquiries in the last few weeks, when the UK left the single market and customs union for good.
“We have a lot of companies approaching us to come to Austria. From the UK it is three times higher than before,” said Schramböck. “It is all different kind of companies. It is IT companies, companies interested in R&D who are searching for a location in the EU. We have a special programme to help them and that is good for us. It had already started prior to Brexit but it has increased since Brexit, especially for small- and medium-sized companies.
“It is because they are not part of the European Union any more and they [now] have barriers. Even if there is a trade agreement they fear that the barriers will hinder them to do business inside the European Union.
“It is always good to be close to your customer and in this case the European market is a single market, so if you want to sell to the European market you have to have an imprint there.”
The Brexit agreement’s Northern Ireland protocol will not be scrapped, the Irish government and the EU have said in an escalating row over the new trade barriers down the Irish Sea.
The Democratic Unionist party leader, Arlene Foster, has called for the measure designed to keep the Irish land border open to be replaced, but Dublin is focused on easing problems with the post-Brexit trade deal that have caused disruption at Irish ports.
The Irish foreign minister, Simon Coveney, told BBC Ulster “there is not going to be very dramatic change”, in the face of calls by the DUP for the protocol to be urgently axed.
“We want the protocol to function in a way that works for everyone, north and south, on the island of Ireland,” he said.
Foster hit back on the same programme, accusing Coveney of being “completely tone deaf to the concerns of unionism”.
On Wednesday the European commission vice-president, Maroš Šefčovič, said the UK and EU had a “shared commitment to the proper implementation of the protocol”.
He tweeted that this had been reiterated at a meeting with Michael Gove, Foster and Northern Ireland’s deputy first minister, Michelle O’Neill, on Wednesday night and they had agreed that “constructive solution-driven cooperation” was “essential to addressing outstanding issues”.
Gove and Šefčovič will meet again next week. It is understood a specialised committee dedicated to the working out of the protocol will be established in the coming days to move those talkson, with a meeting of the UK-EU joint committee chaired by Gove and Šefčovič pencilled in for mid March.
The UK is now demanding a two-year extension to the Brexit grace period for checks on trade but the EU made it clear last night it regarded article 16 as an ultimate on which it would not capitulate.
Efforts to de-escalate the row will do little to assuage the DUP’s opposition to the protocol.
Two days ago Foster, who is also Northern Ireland’s first minister, launched an official campaign to get the arrangements scrapped. At the same time she announced the party would be withdrawing from all engagements with the Irish government on matters relating to the protocol.
While many have considered the move a reflection of the binary politics that often define Northern Ireland, consumers and businesses agree the protocol has caused upset across all communities.
Because it is a difficult compromise, the protocol has few enthusiastic supporters. The EU and the Irish government dislike it because they dislike Brexit itself. The UK government dislikes it because it tarnishes the dream of a clean break with Europe. Northern Ireland unionists dislike it because it puts Northern Ireland in a special category, simultaneously part of a state that has left the EU but at the same time the only part of the UK still subject to the EU’s rules on trade and hygiene. This has the potential to become an existential challenge. The surprise is that it took so long to come to a head.
The volume of exports going through British ports to the EU fell by a staggering 68% last month compared with January last year, mostly as a result of problems caused by Brexit, the Observer can reveal.
The dramatic drop in the volume of traffic carried on ferries and through the Channel tunnel has been reported to Cabinet Office minister Michael Gove by the Road Haulage Association after a survey of its international members. In a letter to Gove dated 1 February, the RHA’s chief executive, Richard Burnett, also told the minister he and his officials had repeatedly warned over several months of problems and called for measures to lessen difficulties – but had been largely ignored.
In particular he had made clear throughout last year there was an urgent need to increase the number of customs agents to help firms with mountains of extra paperwork. The number now, around 10,000, is still about a fifth of what the RHA says is required to handle the massive increase in paperwork facing exporters.
Burnett told the Observer that in addition to the 68% fall-off in exports, about 65%-75% of vehicles that had come over from the EU were going back empty because there were no goods for them to return with, due to hold-ups on the UK side, and because some UK companies had either temporarily or permanently halted exports to the EU. “I find it deeply frustrating and annoying that ministers have chosen not to listen to the industry and experts,” he said.
Contact with Gove had been limited and had achieved little over recent months. “Michael Gove is the master of extracting information from you and giving nothing back,” he said. “He responds on WhatsApp and says he got the letter but no written response comes. Pretty much every time we have written over the last six months he has not responded in writing. He tends to get officials to start working on things. But the responses are a complete waste of time because they don’t listen to what the issues were that we raised in the first place.”
According to the House of Commons library, UK exports to the EU were £294bn in 2019 (43% of all UK exports) while UK imports from the EU were £374bn (52% of the total). The overwhelming majority of exports to the EU from the UK go through ports rather than by air.
Richard Ballantyne, chief executive of the British Ports Association, said the 68% figure sounded “broadly in line” with his impressions of the drop-off in traffic. He said some but not all of the problems with extra paperwork that caused delays could be overcome in time, although he warned some businesses on both sides would look for new markets rather than try to deal with the added friction. Ballantyne also predicted a new set of difficulties in months to come as the infrastructure needed at the point when the UK introduces full import checks on goods from the EU on 1 July would not, in his view, be ready in time. This raised the prospect of a whole new set of issues affecting imports.
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Much of the focus on Brexit trade since January has been on UK exports, as the EU imposed its customs checks immediately – with hauliers reporting that the volume of exports going through British ports to the EU fell 68% last month compared with January 2020.
However, the British government chose a phased approach, postponing the introduction of certain import procedures by three to six months.
These grace periods were designed to give businesses more time to adapt to the new rules and ways of working, but many are set to expire shortly.,
The next big change is due on 1 April, when UK customs will begin controlling imports of animal products, including fishery produce and live bivalve molluscs such as mussels; food considered high-risk such as mince and sausages; and plants and plant products.
These checks, known as sanitary and phytosanitary (SPS) controls, mean all the correct documentation is needed for each consignment arriving in the UK including import forms and health certificates signed by vets.
More changes occur in July, as traders moving goods must make their full customs declarations on entering the UK, rather than submitting forms at a later date. In addition, imports will have to enter the UK at specific locations known as border control posts.
More changes affecting certification and regulations of items such as medical devices have been given a longer transition period, until January 2022 and the start of 2023 in some cases.
The meat processing industry is concerned about April.
“If we have as much trouble importing as we are having exporting it could be quite challenging,” said Nick Allen, chief executive of the British Meat Processors Association.
The overwhelming majority of meat processors’ trade is with EU countries: the UK imports pork and beef from the continent, while exporting products including beef and lamb – a two-way trade worth £8.2bn a year to the British economy.
Once the grace periods end, if the paperwork accompanying a meat shipment is missing or incorrect, it cannot travel to its destination. Hold-ups at European ports because of problems with documentation for exports from the UK led to containers of British meat left rotting on the dock at Rotterdam.
“Delays cost money. If you have a lorry held up for 30 hours unexpectedly that causes a nightmare problem logistically,” Allen said. “Someone is waiting for that delivery, possibly waiting for it to go on the shelves and it is stuck on the port while someone gets the paperwork right.”
Whitehall sources vehemently rejected that claim, insisting freight flows were up to 95% or even 100% of normal levels on some days in January – though part of the RHA’s argument was that in many cases lorries were travelling back empty from the UK to the EU.
“We don’t recognise these figures at all,” said a Cabinet Office spokesperson, adding: “We know there are some specific issues and we are working with businesses to resolve them.”
A government spokesperson said: “Thanks to the hard work put in by hauliers and traders to get ready for the end of the Brexit transition period, there are no queues at the Short Straits, disruption at the border has so far been minimal and freight movements are now close to normal levels, despite the Covid-19 pandemic.
“As a responsible government, we made extensive preparations for a wide range of scenarios at the border, including the reasonable worst case. However, it appears increasingly unlikely that our reasonable worst case scenario will occur.”
However, the RHA’s figure was corroborated by Richard Ballantyne, the chief executive of the British Ports Association, who said it was “broadly in line” with his experience since new year.