August 20, 2020
By: Peter Gregory
Updated 29 January 2021: Now that the UK has left the EU, a lot of the advice in this article is out-of-date (we’re still recommending that you apply for an EORI number if you haven’t already done so). Please see our most recent Brexit-related advice at the article below:
On 1st January 2021, the UK’s customs rules are going to change dramatically …and almost every one of our customers will be affected.
Whether you’re a kitchen-table startup selling handmade items or a large high street fashion label, you’ll soon need to make customs declarations, and potentially pay customs duty and VAT, on any sales or purchases in the EU.
In this helpful guide, we’ll give you a basic overview of how customs works in the UK, explain what’s changing next year, and talk you through some of the practical steps you can take today to protect your business in 2021.
If your business only buys goods from (and/or sells goods to) EU member states, then you might never have handled any customs paperwork or taxes before. That’s because, before Brexit, the UK was part of the European Single Market. In the past, if you were importing from Poland or exporting to France, for instance, you didn’t have to fill in any customs paperwork at all, because we were all part of the one market.
Now that the UK has left the EU, the customs map is being redrawn. We’re in the post-Brexit Transition Period at the moment, so we haven’t noticed any major changes yet — we still only pay customs VAT and duty on goods coming in from outside the EU. From 1 January 2021, when the Brexit Transition Period ends, we’ll all have to pay customs VAT and duty on goods coming in from outside the UK.
The new customs climate presents a big problem for our customers working in the British fashion and apparel industries, because we still don’t know how expensive these customs tariffs are going to be. We only have a few months left before January 2021, but there’s still no post-Brexit customs arrangement between the UK and the EU. If Brexit negotiators can’t agree a deal by the end of this year, then our customers’ fabric and raw materials costs could skyrocket in 2021.
For instance, if you’re a British fashion business that has always bought fabrics from Italy, you will need to plan for the added costs of VAT and customs duty, which will apply on any regular shipments of stock that arrive after 1st January 2021. If there isn’t a UK/EU customs deal by this time, then those two new taxes alone could add as much as 32% onto the cost of your raw materials (20% VAT plus 12% customs duty). It could completely wipe out your profit margin, or worse. (take a look at the WTO website for more information on default customs tariffs)
What’s more, the UK customs authorities expect payment up-front. Her Majesty’s Customs and Excise (HMCE) have the power to hold on to any shipment coming into the country until all applicable customs and VAT taxes have been paid in full. This means that, if you’re a brand-new fashion business, you have to find the money to pay a big tax bill before you’ve made or sold a single garment.
In the UK, businesses don’t have to register for VAT until they’re hitting a certain level of sales (see the current UK VAT thresholds here), so you might think that if a similar system would exist for small businesses when it comes to customs. This just isn’t how customs work.
Everyone — handmade crafters and micro-businesses included — has to pay customs. This is because customs fees are based on the properties of the item that’s actually crossing the border, rather than the circumstances of the person or business that’s receiving the item. If you buy more than £15 worth of goods from overseas, you’ll have to at least pay VAT before those goods can officially enter the UK. If you’re spending £135 or more, then you’ll pay VAT and customs duty. Just take a look at the UK’s current import tax thresholds:
* These thresholds apply to most goods and raw materials purchased for personal or business use. There’s a slightly higher threshold on gifts sent from abroad.
Find out more at gov.uk/goods-sent-from-abroad/tax-and-duty
Most of us bulk-buying fabric & blank garments from abroad buy more than £135 worth of stock at a time, so VAT and customs duties are going to become the norm from 2021. What we still don’t know is exactly how much those taxes will cost us.
If the UK and EU can’t strike a customs deal before the end of 2020, then we’ll have to use default WTO trading terms on 1 January 2021. Under these standard terms, we will be looking at additional costs of 32% or more on textile and fabric imports (20% VAT and around 12% customs duty). That’s a whopping amount of extra money that we’d all have to find just to stay in business. It would completely wipe out the profit margin for a lot of our customers.
If the EU and UK Brexit negotiators do get a deal in place before 1 January 2021, however, then we could pay much less. For instance, the EU and UK could agree a temporary 0% VAT and 0% customs duty rate on any goods travelling over the UK border.
A Brexit customs deal, would help us all control costs and plan for the future, but it probably wouldn’t cut down on customs paperwork. At the moment, 51% of everything we import comes from the EU (read the UK/EU trade stats here). If we have to fill in a customs form whenever we buy something from the EU, the sudden surge in red tape is going to be overwhelming unless there’s a good system in place to handle it.
That’s why the government is asking us all to register for an EORI number.
EORI stands for Economic Operators Registration and Identification. It’s a customs system that both the EU and the UK have been using for years. Similar to a Companies House or VAT number, your business’s EORI number is a unique reference that helps authorities to understand what your business is doing and how much tax you should pay.
The UK Government has said that any business planning to export goods next year will need an EORI number. That means that — before 1 January 2021 — you should apply for your EORI. You can do this at gov.uk/eori
Brexit negotiations are still happening, so it’s still technically possible that we could all get a last-minute deadline extension or a special free trade deal of some sort. We just don’t know for sure. What we do know is that, at the moment, the government’s advice is to apply for an EORI as soon as possible. It costs nothing to apply for an EORI number, and you only have to do it once. Your EORI number doesn’t change as your business grows.
If you trade with the US or other non-EU countries, then you’ll need more than just an EORI number and your customs affairs will be more complex. The Gov.uk website has lots of helpful information on import and export rules here.
You don’t have to deal with the customs paperwork yourself. Lots of businesses pay a customs expert or logistics company to handle customs on their behalf (the same way you might hire an accountant to help with your tax return). Just remember that, even if you hire an advisor, the buck ultimately stops with you. If you’re running your own business, then you are responsible for keeping your business compliant with customs rules.
If you want to handle customs yourself, then take a look at the Institute of Export and International Trade. Founded in 1937, the Institute runs a series of customs training courses and operates a member directory. It’s also worth looking at the Government’s own list of customs training providers.
I hope this article has explained some of the most important customs changes that are coming in 2021. If both sides of the Brexit negotiation table are doing their jobs, we’ll get a sensible customs deal that works for businesses on both sides of the border, but for now it’s best to be prepared for any eventuality. If you haven’t already done so, we strongly recommend that you get your business onto the EORI system, and spend a few hours reading the advice on the UK Government’s website.
I hope this article has explained some of the most important customs changes that are coming in 2021.
If the Brexit negotiators do a good job, we’ll get a sensible customs deal that works for businesses on both sides of the border. For now, though, it’s best to be prepared for any eventuality.
Thanks for reading!