British SMEs, particularly those operating with the e-commerce sector, are suffering the most a year on from the UK and the EU signing the Trade and Cooperation Agreement (TCA), largely due to EU regulation changes to VAT and a lack of resources needed to adapt.
In addition, even though it has been almost a year since the agreement was signed, and many years since the Brexit vote, the government still needs to invest more in technology and infrastructure to ensure a smooth trade of goods with the EU.
The UK-EU Trade and Cooperation (TCA) was agreed on 24 December and entered into force on 1 January 2021. Among other matters, the TCA established the foundation of a trading relationship between the UK and EU reflecting the UK's status as a third country following the UK's exit from the European Union.
As it currently stands, from 1 January 2022 importers of goods from the EU into GB will need to submit full customs declarations; a separate grace period, which waived the requirement for traders to submit a Supplier's Declaration when seeking to claim zero-tariff treatment under the TCA's rules of Origin, will also expire on this date. From 1 July 2022, a number of new requirements for products subject to Sanitary and Phytosanitary controls will be introduced. In other words, additional burdens are imminent.
The Lords Committee took evidence which found that since the agreement of the TCA and the end of the transition period nearly one year ago, businesses trading goods between Great Britain and the EU have faced additional administrative burdens, making it more complicated and expensive to trade with the EU.
These burdens have fallen particularly heavily on smaller and medium sized businesses (SMEs), who have fewer resources to draw upon to help them adapt. This has affected SMEs both in the UK and the EU.
Commenting on the report released today, Lord Kinnoull, Chair of the Committee, said:
The impact of the new trade barriers on business since the implementation of the TCA on 1 January 2021 has been uneven. Smaller businesses, which often lack the resources to adjust to new costs, and the agri-food sector, which faces an additional set of trade barriers in the form of Sanitary and Phytosanitary requirements (SPS) requirements, have been particularly hard hit.
With further customs and rules of origin requirements for importers coming down the track in a matter of weeks, it is vital that the Government communicates these deadlines to businesses and enforces them in a pragmatic manner that seeks to educate traders, rather than punish them.
It is important that these current challenges do not disincentivise GB-EU trade in either direction. We urge the Government to engage the EU in further dialogue and utilize platforms such as the TCA Specialized Committees to reach a more flexible and more comprehensive agreement to develop a mutually beneficial and efficient trading relationships with its neighbors in the EU.
E-commerce hit the hardest
The Committee took evidence from the Federation of Small Businesses, which said that trading under the TCA had been "very challenging" for smaller firms, citing data that highlighted about a fifth of its members who export to the EU, or previously exported to the EU, have stopped that activity since the beginning of the year.
James Sibley, Head of International Affairs at the Federation of Small Businesses, said that "the micro and small end of the SME spectrum quite often lacks the resource to make the necessary adjustments", whereas "businesses more at the medium end ... seem more able to adjust".
And whilst there is no explicit provision in the TCA for VAT charges, the UK's departure from the EU VAT area has meant further friction and burden placed on businesses too.
The Federation of Small Businesses said that for its members, "increased costs and administrative requirements that result from the UK leaving the EU VAT area are one of the biggest concerns for small businesses…concerns are particularly acute for e-commerce retailers and for those engaging in business-to-consumer sales".
Changes to EU rules on e-commerce, which came into force on 1 July 2021, was highlighted as a major concern by those giving evidence.
The rules mean that all commercial good imported into the EU are subject to import VAT, whereas this was only subject to goods over the value of €22.
An Import One-Stop Shop (IOSS) digital portal has been established, which businesses conducting online sales of goods valued at €150 or less can use to comply with their VAT obligations. The IOSS allows businesses to register on an EU-wide basis, rather than in each Member State where they have a turnover above a certain threshold as was previously the case.
In addition, most non-EU businesses using IOSS need to appoint an EU- established intermediary or fiscal representative in order to fulfill their VAT obligations.
The Federation of Small Businesses told the Committee that "in theory, IOSS should make the lives of SMEs exporting to the EU a lot easier", particularly as it meant traders no longer needed to register in multiple EU Member States. But, it added, that the requirement for a fiscal representative was "prohibitively expensive for many small firms ... both in administrative burden and securities paid towards VAT liability."
The British Government has announced its intention to create a "lighter tough" border regime and ‘create the best border in the world', as outlined in its 2025 UK Border Strategy.
The Committee welcomes the Government's intention to implement a lighter-touch border regime, as well as its wider drive to operate the "best border in the world" under its 2025 UK Border Strategy.
The Strategy sets out a number of programmes to achieve these aims, including:
The development of a Single Trade Window, allowing traders to submit all relevant import, export, and transit related regulatory requirements and data into a single government digital portal;
Implementation of an Electronic Travel Authorisation to speed passenger journeys through ports;
A major review of the agencies and checks that occur at the border, "to rationalize these wherever possible"
However, the Committee heard from Elly Darkin, Senior Associate at Global Counsel, a think tank advising on government policy and business, that it is an "urgent priority" that the government focus on "digital infrastructure [and] physical infrastructure at ports and Border Control Ports".
In a letter to the Committee dated, the Paymaster General, Michael Ellis MP, said that the Government has allocated a total of £705m to fund infrastructure, jobs and technology at the GB-EU border, of which £470m was on infrastructure and £235m on staffing and IT systems.
The Committee heard that "some physical infrastructure" was in place in time for the end of the transition period, but further infrastructure will be needed for the introduction of the remaining controls. And that although government officials were "very confident" about their preparations for new infrastructure, it is already clear that temporary arrangements will be needed in some areas.