Brexit's Potential Impact on Cross Border E-commerce

September 26, 2018

If there is one word to describe the current status of Brexit, it's 'uncertainty.' The original date for the departure of the U.K. from the European Union (EU) was March 29, 2019. But now, even that date is in flux. To buy more time to orchestrate its departure from the EU, the U.K. has agreed to a 21-month transition period to make sure that post-Brexit relations will not disrupt the country's economy, pushing the official Brexit date to the end of 2020. During this transition phase, the U.K. will remain part of the EU on a limited basis.

For U.K.-based brands and retailers and international businesses who want to sell into the U.K., the most pressing issue in need of resolution is the re-establishment of numerous trade agreements directly with the U.K. government. In all, the U.K. will need to renegotiate 759 international treaties with 168 countries when it leaves the EU. These trade agreements could present a greater opportunity for international businesses to invigorate cross border e-commerce and sell to customers in the U.K.

Conversely, trade negotiations could become new barriers for global e-commerce providers if the new U.K. trade regulations favor local British brands and retailers. Already, the National Farmers' Union in the U.K. is proposing the addition of "Buy British" buttons to online grocery websites, allowing U.K. consumers to filter out goods that were not produced in-country. While this would benefit U.K. e-commerce companies, it would put cross border e-commerce vendors at a disadvantage.

Another aspect of Brexit that is causing cross border e-commerce anxiety is the U.K.'s pending departure from the EU single market. EU member countries enjoy many benefits from the single market, most importantly barrier-free trade among them. For the U.K., leaving the single market means walking away from 60 percent of the country's cross border trade - nearly half of the country's total cross border trade with other EU countries and another 12% through the EU's preferential trade deals with countries outside of the EU.

The upside for brands and retailers outside of the EU is that the U.K. may be more open to negotiating friendlier trade deals to make up for any losses that are a result of leaving the single market. U.K. Prime Minister Theresa May has been courting the U.S., Canada, and Australia to discuss trade, and closed its first post-Brexit trade deal with Africa that is along the same lines of the trade deal Africa has in place with the EU.

Customs, VAT and distance selling rules

In addition to the U.K.'s departure from the EU single market, it will also be leaving the EU's Customs Union, which is likely to have an impact on the rate of value added tax (VAT) on goods moving in and out of the U.K. to EU member countries. The U.K. government has released a guidance note for businesses in the event that the country cannot reach a customs and VAT deal with the EU. If no deal is reached, compliance with cross border trade taxes could become much more complex. However, the U.K. government has clearly stated that even without a deal, the goal is for U.K. VAT regulations to closely mirror those of the EU, which could mean 'business as usual' for e-commerce providers.

Leaving the EU Customs Union has also called into question where the U.K. will fit into the EU's distance selling rules. The EU's distance selling arrangements would no longer apply to the U.K. in a 'hard' Brexit where no deal is reached. In that case, e-commerce vendors based in the EU would be required to register for VAT with Her Majesty's Revenue and Customs (HMRC), the U.K. tax authority.

Considering that the U.K. is Europe's top online exporter and the goal is to leave the EU with as little economic disruption as possible, it seems likely that confirming details around customs, VAT and distance selling will be a priority as the 2020 Brexit deadline looms. The U.K. has already stated that in the event of a hard Brexit, Northern Ireland would still be considered a member of the EU Customs Union - which presents an interesting cross border retail opportunity in this region.

Over the next two years, the U.K. government has some big decisions to weigh and deals to make to keep its position as a leader in the global e-commerce market. While the details are in progress, cross border e-commerce will carry on as usual, but with a cautious eye on the future. Brand and retailers should focus on building trust and brand loyalty with their current U.K. consumers now to ensure these relationships will still be there post-Brexit. Depending on trade deals the U.K. strikes with EU countries and beyond, retailers may need to re-evaluate product sourcing, pricing of goods, transit, currency fluctuations and marketing.  

To learn more about consumer preferences, considerations and risks of selling in the U.K., download Flow's free ebook, "Keep Calm and E-commerce On: How to Sell in the U.K."

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