Brexit – Will it sink the UK yachting sector?

It might be that I am just getting old (no comments please!) but having recently attended a number of yachting related conferences where there was much talk about Brexit and how it might affect the industry, all I could think was…. In times gone, I remember when we had duty-free at airports (even for EU travel), how EU legislation didn’t really impact our daily life in the UK and how borders were still borders. We seemed to get along OK then so what are the difficulties posed by Brexit now?

Following this line of thought I considered what immediate questions those affected in the yachting industry would have about Brexit. The obvious ones seem to be: i) How will VAT rules in the UK be affected; ii) Will free movement change; iii) What compliance requirements might there be; and lastly, will this make the UK a less or more favourable jurisdiction for yacht owners?

As no-one has any experience of a member state leaving the European Union, my below comments are purely speculative and are my own interpretation on the matter. I am sure there will be opposing views on the subject but it will be interesting to see how things develop should Brexit actually happen.

The exit process

What we do know for sure is that on 23 June 2016 the UK will hold a referendum on whether it should remain as a member of the European Union or not. The result of the referendum will be final and the UK Government must adopt the democratic majority vote.  In preparation of a possible ‘exit’ decision the UK Government has issued a useful document called ‘The process for withdrawing from the EU’.

This document sets out the only way that a country can exit the EU; which is by triggering Article 50 of the Treaty of the European Union.

What would follow is then a long and complex negotiation process, which would require input and agreement from all 27 remaining European Union states as well as the European Commission, European Parliament and the European Council.  The aim of the negotiations would be to secure adequate UK access to the Single Market. The EU Treaty requires that exit by a member state is completed in two years. However, given the complexity of unravelling all the rights and obligations, joint actions, funding structures etc. that have been put in place over the years, it is likely that the UK will need to request an extension to this two year deadline, which must also be approved by all 27 remaining members.

If an extension is not granted and negotiations are not complete, this would leave the UK high and dry. The UK would be without any EU law to protect the rights of UK businesses to trade, UK citizens to live and work in Europe, or UK travellers to move freely in Europe.

The UK could of course choose not to request an extension and could leave the EU without any formal arrangement in place. It would then have to rely on World Trade Organisation (‘WTO’) rules until any new agreement could be reached. This would significantly impact the cost of goods moving out of the UK as the WTO rules mean a range of tariffs would be applied to UK goods. Many of the WTO tariffs are significantly higher when compared to the zero rate tariff, which is currently applied to all UK goods moving into the EU.

UK borders – Customs Duty and VAT

Brexit would mean that UK businesses need to deal with border controls when their supplies or sales cross the UK-EU border. These controls could range from satisfying rules regarding the origin of goods to a substantial increase in the level of import duties payable (depending on which trading arrangement replaces EU membership).

To understand the possible effects of Brexit, let’s look at an example:

  1. If the UK managed to strike a deal with the EU after Brexit (like Iceland and Norway has in place) then it could be considered as part of the European Economic Area (EEA). An EU manufactured yacht imported from Italy would still come in duty-free to the UK because there would be a free trade agreement between EU and EEA members. But the UK importer would need to show documents to prove to the UK border authorities that the yacht was made in the EU and not just branded/transited through Italy to bypass import duties levied on non-EU countries.
  1. On the other hand, if the UK could not strike a trade deal with the EU before the two year deadline was up, then import duties negotiated by the WTO would kick in. In which case, as an example, if a yacht worth £1m was imported from Italy, the UK border agencies would charge £8,000 as import duty and also collect £200,000 as VAT on the import.

Under both cases, the UK would not have access to the coordinated VAT collection regime in the EU. Therefore 20% VAT would need to be paid at the UK border, and the importer would no longer have the convenience of combining this with domestic VAT payments.

It would seem likely that in any future solution, in order to allow the UK to trade goods with other EU member states, there would be a requirement to have some form of formal customs procedures.  This will likely create additional costs in the form of customs clearance and may also mean potential delays due to having to carry out formal Customs entries.

UK as a yachting jurisdiction

If the UK successfully enters into a trade agreement with the EU and are effectively treated as an EEA member, there is not likely to be any significant changes for the yachting industry as EEA membership would formally oblige the UK to continue with many measures adopted in the EU.

However, if the UK left the EU without any agreement or EEA membership then it will be a case of a UK registered vessel arrives in an EU port, hoists the Q-flag, has its ship’s papers ready, passport, visa, proof of vaccination, state all intended ports of call, and be prepared for checks on amount of cash carried, red diesel and alcohol on board. Then, clear in and clear out of every harbour, and hope that immigration, customs and police are all in the same building to make life easier and processing quicker.

In addition, as UK registered vessels will need to be temporarily imported into the EU in order to move freely in EU territorial waters, Captains, Owners and Management teams will need to keep track of the amount of time the vessel spends in EU waters so as to ensure owners are not caught out by overstaying their welcome in the EU and being subject to an import VAT charge.

Sailing an EU flagged vessel into UK waters would again likely mean hoist the Q-flag, be prepared for checks by customs, immigration, and border patrol, account for your whereabouts whilst abroad and pay import duties on your stock of Belgian beer, cheese, chocolate or any other gastronomical goodies that you have bought (because they are hard to find or have got too expensive in the UK due to the duties and tax charges being levied).