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Future of international trade

Robert Marchant, Partner, VAT
08/04/2019
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There continues to be debate about the future of the UK’s international trade arrangements with the many uncertainties arising from Brexit and the manner in which the UK may eventually leave.

Much of this uncertainty is viewed as being counterproductive for the economy as businesses of all shapes and sizes generally crave stability. However, where there is uncertainty or challenge for some, there is often opportunity for others. It is also worth keeping in mind that while Brexit, as a once in a generation to change the political and economic landscape, is clearly significant, it is just one example of a disrupter to international trading arrangements.

Disrupters to international trade

Business leaders have to grapple with a number of disrupters at the time of writing. These range from the threat of global recession, due to a possible economic slowdown in China, to the rise of digital platforms, tariff trade wars between the US and China, recent changes to US taxes and changes to digital taxation, among many others.

Over recent years, the tax climate has also changed as governments and tax authorities have made tax front page news. Across the globe, there continues to be a focus on the taxes multinational companies are paying, in what locations and whether they are paying their fair share. The emphasis on tax being paid where the ‘consumption’ of goods/services takes place, as opposed to where the business is located, is expected to continue as governments look for ways of increasing their local tax takes. Tax laws are frequently out of date for modern business methods and while it is taking some time to build momentum, businesses can probably expect an overhaul to the international tax rules applicable to where taxes are paid on their sales and profits in the future.

Closer to home, some organisations are keeping an eye on potential political instability, particularly as the possibility of a change in the UK government increases, with the possibility of significant changes to fiscal rules and attitudes also possible to UK tax rates for larger corporates.

Regardless of what happens, there will undoubtedly be fiscal changes that will take place, which businesses will need to understand and factor into their planning.

Brexit

According to a November 2018 parliamentary briefing paper, the EU is currently the UK’s main trading partner, with 44% (£274 billion) of UK exports to the EU each year. Trade with the EU is therefore clearly significant and the UK government has previously spoken of its aims of making trade with the EU as ‘frictionless’ as possible. From a VAT and Customs Duty perspective, if the UK leaves the Single Market and Customs Union, movement of goods between the two would currently fall to be taxed as imports and exports and would result in significant changes to the amount of import taxes paid and the administrative processes involved.

It is also worth keeping in mind that, unless there is a ‘no-deal’ Brexit, there will be further negotiations between the UK and EU to determine what the UK trading relationship with the EU will become. There are clearly a range of views on this and it is unknown at this time of writing what form the trade agreement will take. The UK government will also be aiming to secure trade agreements with other countries to take effect once the UK’s withdrawal from the EU is complete. Therefore, there continues to be the prospect of significant change ahead.

Nonetheless, depending on the final shape Brexit takes, the UK’s withdrawal could also present an opportunity for the UK to change its fiscal policies to encourage further investment. For example, if the UK were no longer subject to EU law it would be easier to set-up ‘Free Trade Zones’ (FTZs) which are common around the world and are designed to both facilitate international trade and to promote economic development of the region in which they are located. Perhaps the most famous of these is Shannon in the Republic of Ireland.

Much of the Brexit international trade discussions are focused on how UK businesses can access new markets and it is clear that the world has become a smaller place in recent years. In particular, online market places have made it even easier for businesses to reach new customers, irrespective of where they are located around the world. Many businesses may not have considered these potential customers to be within their target markets just a few years ago. A recent parliamentary briefing paper notes that exports from the UK to the EU have declined from a base of 55% in 2006 which suggests that UK businesses are taking advantage of accessing new international trade markets and may be able to further do so in the future.

Opportunity from overseas expansion

Initially, trading abroad may simply be by exporting from the UK to customers in the overseas markets, or perhaps by using a local agent. While a web presence makes access to international markets easier, the practicalities of language barriers, making contacts, building credibility and obtaining orders often means spending time overseas. Occasional business trips are unlikely to create too many tax difficulties, but as time spent abroad increases, so too do the potential tax and reporting requirements. A pragmatic approach will often be most appropriate at the beginning, but it’s important to monitor activities and make sure that the necessary laws are complied with at the right time. It can be very expensive to sort out after the event, not least in terms of potential interest and penalties.

At a particular point in the maturity of the local market, a business may then choose to set-up or expand their overseas operations on a permanent basis. This could be done through setting-up a local subsidiary or entering into a joint venture with a local business partner. Benefits for setting up an overseas business can include:

  • increased market penetration and access to a wider market of customers
  • improved customer service and after-sales support
  • increased brand awareness
  • access to incentives for foreign investors.

Looking forward

We are clearly in a period of uncertain times for businesses trading internationally. There are a number of global disrupters that need to be considered in business plans and which could have a significant impact on a business’s ability to trade profitably with certain markets; closer to home, there is Brexit, and changes to how we trade with the EU and the promise of accessing new global markets. These fiscal and political changes are all occurring at a time when the world is becoming smaller and it is increasingly easy for businesses to connect with customers all over the world. This creates opportunity in the uncertainty. Specialist advice should always be sought to make sense of which is a challenge and which is an opportunity .

This article first appeared in Financial Director in May 2019.

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Robert Marchant
Robert Marchant
Partner, VAT
London