Identifying and managing tax-related Brexit risks will be critical to telecommunications firms’ overall strategies.
While the future of the United Kingdom and European Union (EU) trade relations may still be unclear, telecommunications firms should be preparing for the departure of the UK from the EU.
Upon leaving the EU Customs Union, the UK will either have a free-trade agreement with the EU or trade between the two jurisdictions will be governed by World Trade Organization (WTO) rules. This change will have tax-related implications for all importers and exporters.
Identifying and managing Brexit risks will be critical to maintaining the right business dynamic going forward.
Telecom equipment and other firms in the industry that face low or no duties have reasoned that the direct duty impact from a hard border will probably be minimal. While this outcome is likely, direct financial cost is not the only area of concern — there are many other ways that Brexit could present unwelcome challenges for telecom enterprises across the business, including within indirect tax.
Disrupted supply chains
Telecom firms need to be prepared for supply-chain disruption. Failure to prepare and address risks now could result in significant issues once the UK leaves the EU.
A slowdown in the movement of goods across borders after Brexit would have many repercussions. Timely access to components, including vital spare parts, is needed to keep infrastructure working. Delays at the border, for example of a part needed to maintain network access, could impact business continuity and the brand, as well as the company’s ability to meet regulatory requirements.
Such disruptions to supply chains could also slow research and development and, ultimately, innovation within a business. And if the latest smartphone is out of stock because of delays at the border — unlike models of rivals — the business will clearly be at a competitive disadvantage.
Some of the turmoil may come from internal sources. With fluctuations in the British pound since the Brexit vote making supply chains costlier to manage and the risk of delays at a hard UK-EU border, many firms importing or exporting goods to and from the UK are considering switching to national suppliers. This will lead to many new contracts and changes in where goods are made and shipped and which indirect taxes, including customs duties and value-added tax (VAT), apply.
A November 2017 survey of 1,118 supply-chain managers in the UK and Europe by the Chartered Institute of Procurement & Supply found that 63% of EU businesses plan to move their supply chain out of the UK, while 40% of UK businesses plan to replace EU suppliers. Half of UK businesses surveyed expressed dwindling confidence in the ability of the UK and EU to reach a deal for “free and frictionless trade” in the future.
There could be other external factors disrupting the post-Brexit supply chain. Many key UK ports have limited customs clearance infrastructure. For example, the UK’s tax administration, Her Majesty’s Revenue and Customs (HMRC), confirmed that the port of Dover handles 17% of all UK trade flows, but 90% to 95% of those movements are currently cross-channel.
A slowdown in the shipment of goods across the UK-EU border appears to be a certainty once the UK leaves the EU. Additionally, Brexit could result in delays in trade with non-EU countries, especially if volumes rise when logistical and administrative capacities are overloaded.
Administrative burdens for customs declarations and other trade-related documents are set to significantly increase. Many companies assume their suppliers or freight forwarders will be responsible for the paperwork for imported goods, but this may not be the case and, if the telecom company is the importer of record, it will be responsible for the paperwork for goods entering the UK.
The surging administrative burden could put a strain on resources of both businesses and tax administrations and lead to higher costs. HMRC, for example, estimates that customs declarations will rise almost fourfold post-Brexit, to 300 million a year. Compounding the problem is the UK’s outdated IT system for customs declarations, known as CHIEF, which is already struggling with the 76 million import-export declarations currently filed each year.
Before the Brexit referendum, the UK had announced plans to switch to a new system, CDS. The upgrade will now be under even more pressure, as the changeover in the reporting system could coincide with a big jump in customs-declaration volumes after the UK leaves the EU.
Telecom companies should consider other tax-related consequences. In the UK, firms are preparing huge investments in the next generation of mobile networks. Trials of 5G networks are slated to begin during 2018 and launch in 2020. In light of these investments, businesses should consider how Brexit and changes in the supply chain could affect cash flow, including VAT refunds.
New regulations could also affect indirect taxes. The UK communications regulator, Ofcom, may no longer be obliged to implement EU directives, including those that cap roaming charges for EU citizens. As a result, UK operators may want to charge (and tax) Britons more for calls abroad, and EU operators could change pricing for EU citizens visiting the UK.