Four months on from the implementation of the Brexit deal, businesses are starting to wonder whether they need to change their operating model. Oliver Bridge shares insights from recent client conversations and thoughts on options ahead of any international restructuring.
We finally left the European Union on 31 December 2020. The initial compliance challenges have been negotiated and goods are moving across borders more freely, though at a greater cost. Businesses are now turning their attention to long-term considerations, such as profitability and the necessary operational changes this might require.
Our clients are asking us how to minimise the impact of these increased customs charges on their customers. They're particularly concerned about business-to-customer transactions where import formalities, supply chain inefficiencies, and payment of taxes or tariffs could result in a loss of sale.
This inevitably leads to conversations around the interactions between supply chain and indirect tax, in particular, the “one stop shop” and the variety of interpretations of customs rules by various member states in the EU. The size and scale of clients operation in the EU and the potential for growth then leads to the next question: 'do I need to set up overseas?'
The answer depends on your business, but we've found there are four main reasons why that might be the right course of action.
Four reasons why you might consider establishing a presence in the EU
1 Regulatory barriers
For example, food business operators and those still wishing to use Conformitè Europëenne (CE) marks will need an EU address for communication. Whether this is as an authorised representative (natural person) or an established business/legal entity (legal person), it's one of the first steps towards setting up in Europe.
2 Indirect tax challenges
VAT and Customs are on many people's list of issues, but there are positives and negatives.
For some small businesses we've spoken to, indirect tax is a hurdle too large and costly to make exporting worthwhile. We've seen many businesses struggle with VAT and customs representation issues and multiple VAT numbers.
However, the expansion of the One-Stop-Shop in July will help businesses selling low value goods to private consumers in the EU with this by ensuring organisations only need one VAT return for all qualifying distance sales to Europe, making it much more simple and increasing the ability to operate from the UK for lower-value sales.
3 Customs barriers
Customs barriers are a problem for many B2C businesses, especially those sending many lower-cost items to Europe.
Typically, each package needs a declaration at a cost of over £40 per package. This means many deliveries aren't economical.
We've seen a trend of businesses looking to set up EU warehousing operations, often operated by a third party, to receive consolidated loads from the UK and then forward the individual packages. This increases the time to delivery, but reduces overall cost. Other businesses have looked at ways to price in the additional costs.
4 People and mobility issues
Many clients provide services across Europe. Before Brexit, they would employ UK nationals who would travel to work. The end of free movement has seen the rights of UK nationals change.
To avoid the additional challenges around navigating individual member state immigration regimes and the potential visa requirements, some businesses are setting up European entities and looking to staff them with EU nationals.
Should you decide that you need a greater presence in Europe, there are a number of ways of going about achieving this.
Three steps for increasing your presence in Europe
There's a whole spectrum of models that businesses are using to trade with Europe. Here are three steps to expanding into Europe:
1 Light-touch method (outsourcing)
Some companies are using international firms or individuals to conduct key processes or practices on their behalf. For example, a fiscal representative for VAT or you may appoint a ‘natural person’ to operate on your behalf for CE marking or goods compliance.
This gives the benefit of local expertise without the need to formally establish in the country. Think of it as renting, rather than buying. This activity can be treated as a business expense, rather than a capital outlay.
Many clients are using this to maintain service to EU customers after Brexit, absorbing the extra cost, while they explore longer term opportunities around steps two and three.
2 Establishing a basic presence in an EU market
This might include setting up a branch of your company overseas, or obtaining an EU Economic Operators Registration and Identification number (EORI) number or VAT registration. Opening an office in Europe or employing local staff may trigger a need to register a permanent establishment for corporate income tax purposes in the local jurisdiction.
This arrangement provides greater control, as it gives a business the ability to trade with EU customers without the reliance on third party brokers/representatives.
This has been particularly appealing to larger businesses who are unable to absorb the extra cost associated with step one, and have sufficient scale to merit the additional capital outlay. In addition, it may also be enough to secure regulatory approvals, such as addresses on labelling.
This could be a platform to launch onto stage three.
3 Full overseas operation as a European company
Setting up a new company in a foreign market is the bells and whistles approach.
This will enable you to conduct your business from a foreign base with full regulatory entitlement. This is something a lot of financial services businesses decided to do back in 2018/2019 to avoid any potential restrictions to trade in services.
Though this gives the greatest access to market, it does come with increases regulatory and reporting requirements. Each business is unique and will need a solution tailored for them.
Overall, it is important to understand which customers and products are profitable in each scenario demonstrating the best cost to serve model for the business.
To discuss how your business is coping and what steps you might want to take to increase profitability, contact Oliver Bridge.