Contact: Neil Stockham, Partner
A sigh of relief for retailers
Notwithstanding, the late timing of the news and significant anxiety caused by the protracted negotiations, the announcement of a free-trade agreement between the UK and EU on 24 December was largely welcomed by UK retailers. The deal protects consumers on both sides of the Channel from c£3 billion in import tariffs on everyday goods. Given that nearly 80% of UK food imports come from the EU, the news should bring a collective sigh of relief to retailers and households alike around the UK.
However, while the UK and EU Governments have taken a crucially important step in reaching a free trade agreement, the hard work on implementing this new arrangement now begins to ensure there are indeed no tariffs from day one and to enable the compliance infrastructure for checks to run smoothly from the outset. The retail and logistics industries will be scrutinising the operational procedures over the coming weeks as their new trading arrangements begin in earnest.
The closure of France to UK traffic over the Christmas period provided a stark reminder of what can go wrong and how quickly hold ups and bottlenecks can disrupt key supply chains where friction prevails. So although the UK has left Europe it will still need to work collaboratively with its European trading partners to find pragmatic solutions to minimise red tape and keep freight moving.
Businesses should continue to identify when and where goods cross borders. Going forward, the movement of goods across the border between the UK and the EU will trigger compliance, registration and administrative requirements from a customs duty and VAT perspective. Read our full guidance for more information.
Contact: Paul Fenner, Partner
Brexit - post deal signed
Since leaving the EU on 31 December 2019, construction companies had much to do to get prepared for transition for Brexit, but the Deal was only signed at the end of December 2020. The deal that entered into effective from 1 January 2021 has meant there are no tariffs, but trading with EU is likely to be more restrictive. For all companies, we know that for future trading will involve much more paperwork because of Brexit.
Construction companies should be taking expert advice. Businesses should look at their contract terms, supply chain and whether they need to find alternative suppliers, use the reliefs available to protect their cash flows in respect of customs duties, secure and check staff and workforce are eligible to work in UK and, finally, prepare for any transport delays.
In the most standard form JCT or NEC contracts, the contractor takes the risk (in terms of both time and cost) for the supply of goods, materials and the availability of labour. Contractors should consider the possible impact on the rights and obligations under the contracts, timing, performance, right to terminate if materials are not supplied by a certain date. The key question is: “Is the contractor exposed to a claim for damages or losses resulting from any delays?”
Areas construction companies should review carefully include:
- Supply Chain - from a group perspective, the question you should be asking for each entity is: “How is your supply chain handling Brexit?” The EU supplies 60% of the raw materials to the Construction Sector in respect of bricks, cement, concrete, timber and other building materials. Fortunately, with no tariffs, taxes or quotas, there should not be a significant impact on forecast costs, however, this should be considered as part of ongoing reviews of project costs. Contractors should ensure that any imported raw material increases in prices are reflected in the costings.
- Transport - Border checks on goods entering the UK are likely to add to delays to the supply chain, as product origins are checked and relevant duties are considered. This will affect ‘just in time’ procurement, which will slow down and delays on projects. We saw before Christmas in 2020 the traffic jam of delayed lorries and it is unlikely to be the last time there are delays.
- Labour - There is a potential shortage of labour available to work on construction sites because of immigration rules. EU Settlement Scheme allows EU citizens already living and working in the UK to remain in the UK to June 2021 and they will be given ‘Settled Status’, if they have lived in the UK for a period of five years. After 31 December 2020, anyone wanting to work in the UK will be subject to a ‘points based’ application system (designed to attract skilled workers, such as architects, surveyors, engineers and skilled trades such as bricklayers, carpenters – although not a number of roles such as general labourers).
- Quality Standards - Currently, the quality of construction goods, materials and products are still controlled by EU Regulations, especially the CE mark - CE marked materials are allowed in the UK until 1 January 2022. After this date, the Government plans to create the UKCA to replace the current CE mark. Although the UKCA will be closely aligned to the CE mark, it could be that there needs to be more testing of the quality of products, which could cause additional cost and delays to the projects.
- Public procurement – After the transition period, contracting authorities will no longer be obliged to publish notices in the Official Journal of the European Union (OJEU). A new UK e-notification system for Tenders will need to be used and established.
Contact: Neil Fung-On, Head of Financial Services
Brexit: What does the agreed deal mean for UK Financial Services sector?
On 24 December 2020, after years of discussion and a final nail-biting fortnight of negotiations the UK and EU agreed a Trade and Cooperation Agreement. While the agreement secures tariff-free cross border trade of goods, which will be a relief to UK manufacturers, it effectively amounted to a no-deal scenario for financial services.
To be determined
The treaty did not secure access to the EU for British-based banks, insurers and other financial firms. The EU will determine whether or not to grant equivalence to British firms in the coming months. Brussels said in its Christmas Eve statement on the agreement that it will grant equivalence rights “when they are in the EU’s interest”.
Equivalence is not the salve some proponents would claim. It makes for a shaky foundation for businesses to build upon as equivalence can be withdrawn by the EU at just 30 days’ notice. In July 2019, Switzerland lost equivalent status and EU investment firms were no longer allowed to trade on the Swiss stock exchange.
The UK’s position vis-à-vis pursuit of equivalence is currently ambiguous. Andrew Bailey, Governor of the Bank of England, has told MPs that following EU rules on financial services indefinitely would be too high a price to pay for access to the single market. “I would strongly recommend that we don’t become a rule taker. I think that is a very bad place to end up in. If the price of that is no equivalence, then I’m afraid that will follow.” Meanwhile, the City minister, John Glen, has said that Britain will not seek to engage in regulatory arbitrage and does not intend to diverge from the EU’s rules. He stated that Britain would not be “seeking to wilfully diverge in every area for the sake of short-term presentational gain”.
In the absence of equivalence it is important to note that there is an alternative framework for co-operation in place already. On a global level, both the UK and EU member states are bound by international standards bodies such as the Basel Committee on Banking Supervision and the International Organization of Securities Commissions (IOSCO). Furthermore UK regulators have quietly signed Memoranda of Understanding with ESMA and individual EU National Competent Authorities (NCAs) which permit certain cross-border activities to continue on a country-by-country basis.
Aside from the matter of equivalence, detailed arrangements relating to data sharing and migration remain to be agreed which are key to financial services firms. The UK has also unilaterally amended its VAT rules which may benefit some financial services and insurance businesses – read more.
Potential immediate impacts
In anticipation of losing access to the EU single market, many UK Financial Services firms established independent operations on the continent and transferred jobs and assets there. Now that the deal has been agreed and the position with respect to single market access clarified, we anticipate many more firms will follow, particularly smaller firms who may have waited to see the outcome of the negotiations before executing Brexit plans.
It remains to be seen whether the lack of equivalence granted to UK venues will lead to fragmented liquidity and increased costs in the longer term. However on the first trading day of 2021, the Financial Times reports that nearly €6bn of EU share dealing shifted away from the City to facilities in European capitals.
Looking to the future
The UK will now focus on securing advantageous individual trade deals and regulatory cooperation with key financial services hubs across the world, looking beyond Europe to Singapore and New York.
While the question of equivalence has yet to be resolved, there is clearly appetite within the UK government to flex our newfound freedoms. There is an outstanding consultation by HM Treasury to explore how the UK regulatory framework could be adapted to our new position outside the EU. This consultation could result in a complete overhaul of the current ‘twin-peaks’ approach for financial services regulation.
In November 2020, the Chancellor announced a review into current listing rules with a view to encouraging firms to list in London rather than New York. For insurance firms, some changes to Solvency II are expected in the coming months following the Treasury’s Call for Evidence in October 2022. The government has said that it wants to make it easier for insurers to invest in long-term infrastructure projects.
This year’s COP26 climate conference will be held in Glasgow and presents an opportunity for the UK to present itself as a leader in green finance, building on Rishi Sunak’s December announcement outlining proposals to support sustainable financial flows and the issuance of the UK’s first Sovereign Green Bond in 2021.
The UK is positioning itself to benefit from its EU exit and thrive outside the single market. Ultimately, there is a balance to be struck between deregulation in the interest of competitive expansion and maintaining the integrity of the markets and our existing consumer protection framework.
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Contact: Stephen Kehoe, Partner
Top tax matters for insurers and intermediaries to consider post-Brexit
The Trade and Cooperation Agreement between the European Union and the United Kingdom (TCA) which was agreed on 24 December applies from 31 December 2020 but it contains no detailed agreement on the future relationship for the regulation of financial services.
A separate Joint Declaration was made under which the EU and UK “agree to establish structured regulatory cooperation on financial services, with the aim of establishing a durable and stable relationship”. This is aimed at developing a Memorandum of Understanding (MoU), by 31 March 2021, establishing the framework for this cooperation. The MoU will not be as legally effective as an international treaty and is unlikely to include any provisions that make up for the loss of passporting rights under the Single Market Directives. Equivalence decisions, such as those contained in the Solvency II Directive, are therefore still the subject of negotiation. The MoU might set out a timetable for their agreement.
Businesses should consider whether their current structure or any alternative structure (already put in place in anticipation of Brexit) allows them to continue operating seamlessly across the EU or whether any further changes need to be made.
As part of this process, businesses should consider the tax implications carefully to manage any risks and to benefit from opportunities. Here are the key matters to consider from a tax perspective for businesses operating in the insurance sector.
1. Insurance value chain
Whether insurance groups use their existing UK operations to service their EU business and/or establish new operations overseas, the interaction between the tax regimes of different jurisdictions is complex. Businesses should consider for tax purposes how much profit to attribute to each country, the requirement to price intra-group services at arm’s length and transfer pricing documentation. They should also consider the risk of double taxation and availability of reliefs under double tax agreements and domestic law.
Employees may be required to travel overseas for business. Businesses should consider the employment tax implications of staff travelling overseas to work and the risk of their activities creating a foreign permanent establishment for corporate tax purposes.
2. Transacting with the EU
Businesses should map out the key transactions with the EU and consider whether this triggers a VAT charge post Brexit.
In case of services, in most situations, the VAT treatment may remain unchanged. However, this is a moving landscape and we are expecting changes concerning how some of the concepts on VAT Grouping and establishments are interpreted going forward. These changes could have a material impact on the VAT treatment of non-insurance related services imported into the UK which were previously considered to be VAT-free but now could be subject to a UK VAT charge. Businesses should plan for such potential changes.
3. Moving landscape - VAT Grouping and fixed establishment
HMRC has launched a consultation concerning the rules for VAT Grouping. The consultation focusses on how the eligibility criteria should be interpreted and indeed, whether VAT Grouping should be made compulsory.
Among other things, HMRC’s approach to whether a business has a fixed establishment in the UK is also evolving. This is reflected in their questions for consultation and also the wider approach to processing VAT Group applications and the VAT cases emerging in respect of establishment issues.
Businesses will need to factor in the potential changes and the possible impact on their own structure from next year.
4. VAT recovery
Post-Brexit, insurance related services to EU business will be treated the same as services being provided to non-EU. This means that from 1 January 2021, businesses may be able to recover VAT on costs that have previously been treated as irrecoverable.
This could be good news for many businesses as it could lower VAT costs. However, businesses should be careful as the VAT recovery does not apply to all services to the EU. Insurance agents/brokers providing insurance intermediary services to an EU client whose customer belongs in the UK may still have to block VAT recovery. There are also some restrictions in respect of certain costs incurred prior to 1 January 2021 but which are used for supplies made from 1 January 2021.
It is important to assess the fact patterns of your operations and to identify areas of the business impacted by the new rules. Businesses may also benefit from revisiting their existing partial exemption special methods. There are wider commercial considerations too – for example, reporting and managing systems, processes and controls.
5. Exit tax
Many UK insurers and intermediaries have transferred their non-UK EU business to an EU subsidiary as part of their Brexit planning. This may give rise to a chargeable gain if assets have left the UK tax net. Asset valuation, in particular intangible fixed assets, may not be straightforward and can be subject to challenge by the tax authority.
In addition, depending on how the transaction is undertaken, this may give rise to a VAT charge or be treated as a VAT-free Transfer of Going Concern (TOGC). The TOGC rules are complex and the VAT-free treatment is highly dependent on the specific fact pattern. Depending on the specific circumstances and how the transaction is effected, this may affect the business’ ability to recover VAT. Therefore, businesses should plan for the tax consequences before making any key changes.
6. Tax leakage
From 1 January 2021 UK businesses will no longer be able to rely on EU directives to mitigate withholding taxes on cross border cash payments such as dividends, interest and royalties. Businesses should assess their withholding tax position including the availability of reliefs under double tax agreements and domestic law. See BDO’s Brexit withholding tax tool
7. Exit strategy
Insurance groups may decide to dissolve or dispose of their overseas EU business in the future. This is likely to give rise to tax charges so businesses should plan ahead and assess the potential tax implications.
A common theme running across all these points is to assess and to plan. Without an initial assessment, businesses are potentially at risk of inadvertently creating unwanted tax consequences.
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Contact: Jason Whitworth, Partner
Unsurprisingly, the Brexit transition was one of the most pressing issues for the UK Logistics sector, as revealed by our recent survey of 100 top decision makers for the BDO & Barclays Logistics Confidence Index 2020.
The deal announcement will have been met with some relief. While operators’ attitudes were perhaps slightly more relaxed about – or perhaps simply resigned to – Brexit than the previous year, possibly because they felt more prepared, nearly half (47.9%) still feared they would do less business with EU companies in the event of no trade deal being agreed. With a trade deal in place, broadly speaking, the majority of respondents felt that Brexit would have little impact on their level of business, whether trading with EU, non-EU or UK customers.
Yet our survey showed that the industry was still experiencing a mixture of nervousness and calm towards the terms of the UK’s future relationship with the EU. The Free Trade Agreement has established zero tariffs on goods, but it has put up new barriers to the flow of goods, including new paperwork, customs checks, and health/standards checks for food and agricultural products, and consequently added new costs to the expense of cross border trading.
The deal came into force on January 1 and at the time of writing there have been only a few incidents so far when drivers did not have the right paperwork. However, we are currently in the holiday season, the quietest time for trading in the year, and many anticipate delays as trading volumes increase later this month, with new post-Brexit customs systems largely untested. Reports that businesses have been stockpiling in anticipation of supply difficulties may mean less disruption in the short term but a longer curve before trading resumes at normal levels.
Anecdotally our feedback showed some uncertainty among both hauliers and clients as to what is expected, with the government having published hundreds of pages of advice as to what businesses must do, yet reaching an agreement with only seven days’ grace before their implementation. Preparedness may depend on the resources of the business, with larger companies able to implement systems in advance more easily, and smaller distributors missing that support. The RHA estimates that 50% or more of small- to medium-sized companies might not be ready for the border checks, and warns that much of the ensuing chaos will be invisible compared to the scenes at Dover before Christmas, with freight instead held up at distribution centres round the country. Logistics businesses have reported the need to assist customers with the new requirements - providing opportunities to offer customs, advisory and consultancy services, as a result of ongoing changes to international trading agreements.
There will be other important wrinkles to iron out as the detail of the agreement is absorbed. Not least with the reduction in cabotage, with large trucks restricted in the Free Trade Agreement to three movements within the EU before returning to the UK. This will restrict the ability to tramp across the EU, impacting specific markets such as Live Events. With 85% of the European concert logistics businesses currently based in the UK, without an exemption this may present barriers in European touring, a sector already struggling following the pandemic.
It is also worth mentioning the impact on driver shortages, a perennial major problem for logistics businesses. The knock on effect of the pandemic and Brexit combined has led to a reduction in the number of EU nationals in driver roles, which had helped to mitigate the issue in previous years. Government support with measures such as funding for training and improved national facilities for drivers is being sought to encourage UK workers to fill these vacancies.
As to the wider picture, there is a level of readjustment ongoing in the logistics sector, due to the pandemic and the consequential reset of the UK’s manufacturing, consumption and buying habits during lockdown, with the supply chain in the front line of these changes. Brexit feeds into the mix just as UK businesses are already adjusting their supply chains and inventory levels and require new logistics operations to serve their customers.
There is plenty for the industry to be working on at the moment. Gauging the effect of Brexit on the sector against the backdrop of the pandemic may prove difficult. It will take some time before the trading conditions settle, and we can see how much has changed irrevocably.
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Contact: Richard Austin, National Head of Manufacturing
Since the EU referendum in 2016, UK manufacturers have been on a topsy turvy journey and whilst quite late in the day, the news that the EU and UK signed a new Trade and Cooperation Agreement (TCA) brings huge relief for UK manufacturing, which accounts for 53% of the UK’s total goods exports (Make UK 2020/21). With the EU being the UK’s largest trade partner, the end of the transition period means immediate changes in how manufacturers will now be trading with the EU and the wider world.
The initial announcements that the TCA allowed for tariff-free access for goods moving between the UK and EU was positive news for the sector. However, taking a deeper dive into the details, this does not mean there will be blanket tariff-free access for all goods in all circumstances. In order for goods moving between the UK and EU to obtain this benefit, manufacturers will need to demonstrate ‘originating’ status within the UK or EU by meeting preferential rules of origin. Where goods originally come from a third country or are made up of components from elsewhere, then duty may apply depending on the type of product, the level of transformation performed in the UK and the arrangements in place.
Manufacturers have complex, highly integrated and global supply chains and it is now imperative that they understand the origin of goods and parts to weigh up the relative costs and merits of tracking a full supply chain or accepting tariffs. Whether UK businesses are looking to import or export, there are a number of risks they need to be aware of. Read more on the rules of origin here. While easements are in place until 31 December 2021 allowing businesses to avoid providing supplier declarations, manufacturers must be confident that goods meet rules of origin. Businesses now have the important task of beginning preparations to trade under the new agreement by the end of the year.
With many manufacturers operating just-in-time models, COVID-19 demonstrated how supply chains could be impacted overnight halting production for days if not weeks. Going forward, to trade seamlessly with minimal disruption, Businesses need to ensure they have the necessary paperwork under control - whether that is VAT, customs, workforce planning or adjusting contract terms.
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Contact: Richard Greiner, Partner
As with most business sectors, the eventual conclusion of the UK-EU Trade and Cooperation Agreement (TCA) came as welcome news to the shipping sector. Set out below is a commentary including some specific analysis of the TCA covering maritime transport, the movement of goods, fisheries, employment and tax issues as well as the future outlook for the sector.
While much of the UK maritime sector’s activity supports trade flows across the globe, there is significant maritime trade between the UK and the EU. Therefore, the inclusion of maritime transport in the TCA was important, in particular the section on International Maritime Transport Services (IMTS) which covers both freight and passenger transport. The IMTS section maintains the principle of unrestricted access to international maritime markets and trades. It applies both to ships flagged in the UK or EU member states and to ships operated by companies either in the UK or EU member states.
However, there are a number of practical issues for shipping not covered by the TCA. For ships’ operations, one of these issues is that Certificates of Competency (CoC) for crew issued by the UK are no longer automatically recognized in the EU. The EU has an existing mechanism for EU-wide recognition of CoC’s from a third country, such as the UK. But, for the UK, this will take some time during the course of 2021 to put into effect. In the interim, management of CoC validity will require close attention.
The TCA established a framework with zero tariffs and no quotas on goods moving between the UK and EU. However, the UK withdrawal from the EU, as widely trailed, has put up new barriers to the flow of goods, including new paperwork, customs checks, and health/standards checks for food and agricultural products. The implementation of all these new procedures is presenting numerous practical challenges including to shipping and certainly will take some time to fully bed in. To read more on this from BDO, please refer to the analysis by our Logistics experts here.
One of the most contentious areas of the TCA negotiations was on fisheries, particularly with quota shares of fish. Eventually a compromise was reached, such that UK fishing boats will secure an increased share of the UK fish quota phased in over a five year transition period up to 30 June 2026.
For employers, non-UK nationals are a key component of the shore-based workforce in the UK shipping industry. Employers who had EU citizens already on their payroll should encourage them to apply for pre-settled or settled status by the deadline, 30 June 2021, in order to maintain employment continuity for these personnel. Beyond those EU citizens who fulfil these criteria, in order to employ any further non-UK nationals, employers must engage with the UK ‘points based’ immigration system.
The TCA included a Protocol on Social Security Coordination. After so much uncertainty prior to the TCA, it is positive for employers from a social security perspective that the protocol largely confirms the position prior to withdrawal. Thus it can only be possible for an individual to be within the social security legislation of one country at a time and the potential scenario of compulsory double social security contributions will not arise - read more. That said, the employment taxes aspects of engaging EU crew members following the UK withdrawal from the EU will continue to present numerous practical issues, much as they did prior to the withdrawal.
Most of the UK tax rules as they affect shipping were not dependent on EU membership and thus most UK tax reliefs survive post the UK withdrawal from the EU. As a result, the UK will continue to be a business-friendly base from which to conduct shipping activities. In particular, the UK tonnage tax regime for shipping remains in place. Under the TCA, the EU State Aid regime will no longer apply though, of course, the UK’s own competition rules will continue in force. It is welcomed that the UK government is pro-actively considering enhancements to the existing tonnage tax regime.
The TCA provided welcome certainty in many aspects of the future business operating environment between the UK and the EU. The UK continues to offer excellent infrastructural support for shipping businesses, including unrivalled industry knowledge and expertise, and is the principal legal jurisdiction for shipping. Now outside the EU, the UK will continue to develop and it is important that the maritime sector remains in focus. As an example, the Freeports initiative should help encourage new investment, innovation and employment. All these factors, combined with the presence in the UK of leading maritime organisations, mean that the UK will continue to flourish as a centre of global shipping excellence following withdrawal from the EU.
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