Besides the political upheaval and volatility that will follow the decision to leave the European Union, what direct effect will this have on a UK business?
Import Duty and VAT
Let’s look at a business importing plastic toys from China and then selling these direct to UK consumers. When the goods arrive in the UK, they are charged import VAT and duty. For this toy the import duty rate is 4.7%. The UK business has to pay the freight company 20% VAT and 4.7% duty plus some carriage charges. The business reclaims the 20% on its VAT return.
The 4.7% duty is passed on to the customer and it is the customer who bears the 20% sales VAT and 4.7% duty.
If the goods were imported from a European supplier, the VAT between the UK business and the European supplier is self-cancelling, but at the end of the chain the customer would still pay the same amount of VAT and duty.
The principle of tariffs (besides tax revenue) is to make goods from abroad a little dearer than goods produced at home – it helps UK manufacturing. When the UK joined the European Union, that principle was extended from the UK border to the border of the whole EU.
With Britain leaving the EU, would this change? In the short run, probably not. Later however, if the UK no longer needs to use the same 4.7% import duty for these goods as the rest of the EU, the government might set a different rate of import duty.
This rate might be higher for one country than another, and will vary with the type of goods. It would be up to the UK and Germany for example to agree import tariffs on German cars, and it is unlikely that Germany would raise their tariffs on what they buy from the UK, partly because the tariff is not set by Germany but by the EU, and partly because Germany would not want to raise tariffs on UK goods anyway because the UK would probably raise tariffs on German goods. There is a strong incentive to keep things stable.
For a country outside the EU, it is their decision as to what tariff rate they charge on our exports entering their country. If the UK were to change the tariff (tax) on what we buy from that country, then they might respond by changing the tariff on what they buy from us. Again, the incentive is to keep things as they are.
It’s not that simple
Much of what the UK exports is services rather than goods. The principles are the same, but the mechanisms for charging taxes are more complex.
Balance of Trade
This thumbnail – an article on the website of the Office for National Statistics – shows the balance of trade – imports v exports – for the period April 2014 to April 2016. It shows that the UK has a net export of services (orange), and net import of goods (blue) and a net overall import (red line).
The UK imports much more than it exports, which represents a flow of money out of the UK. In the light of the vote to leave the European Union, in the next few years the UK government may re-examine the tariffs and how they affect what the UK buys relative to what the UK produces itself. Outside the European Union, the UK government may set tariff rates different to the standard EU tariffs table, and the government will try to optimise tariffs to assist UK export sales to other countries.