Brexit could end up costing Estonian businesses a lot

CEO of Magnetic MRO Risto Mäeots

PHOTO: Sander Ilvest

The Tax and Customs Board urges Estonian companies to prepare for a hard Brexit that would bring customs fees and new certificates. Aircraft interiors maker Magnetic MRO has had enough of uncertainty. “Deal or no deal, we have made our decision and the train has left the station,” said CEO Risto Mäeots.

Many questions still remain unanswered regarding Brexit, with the October 31 leaving date looming. On the one hand, the British parliament has passed a law stating that the country cannot leave the union without a deal and that Brexit should be postponed once again to have more time to reach an agreement with the EU. On the other, PM Boris Johnson has threatened to take his country out of the union on October 31 no matter what.

The latter possibility would also hit Estonian companies doing business with the UK. To soften the transition, the Estonian Tax and Customs Board notified around 8,000 companies of the possibility in spring but received fewer than 100 replies. “Companies can take precautions. If so far we have seen everything become simpler and faster, a hard Brexit would cause us to take several steps back,” said Külli Kurvits, deputy head of the board’s customs department.

The UK leaving the European Union without a deal would basically make it a third country, like China and Russia are today. This would first mean customs fees and procedures. Imported goods would be subject to VAT through customs declarations, whereas the rate would depend on what the goods would be used for. “No one is asking companies what they use imported goods for today. It would become very important in terms of customs [in case of a hard Brexit] as all fees and claims would depend on it. Failure to pay attention to this in customs could end up costing companies a lot more than it should,” Kurvits emphasized. She gave the example of a robot imported from the UK to display advertising in a shopping mall. The robot would be subject to a 20 percent VAT rate in that case. Should the robot work at a hospital, the rate would be 9 percent instead.

Goods stuck in customs

Kurvits said the agency is most afraid of the short period immediately before goods would have to be declared. “It is important for companies to be aware of this multitude of possibilities and be able to pick the right one,” she said.

But taxes aren’t the only problem for companies. Companies that have not prepared for Brexit could find their goods stuck in customs because they are no longer registered with EU market supervision institutions. Goods previously registered in the UK would have to be reregistered in the EU after Brexit.

The latter problem has been on the agenda of Estonian aircraft maintenance services provider Magnetic MRO that has a production facility at Gatwick Airport. “Our main problem is that European Union Aviation Safety Agency certificates will no longer be valid,” CEO Risto Mäeots said. He added that the company has duplicated all of its certificates by today and brought some of them to Estonia, and that production would be moved under new certificates should Brexit happen. “It was very painful for us. We have really been jumping through hoops here,” Mäeots said.

Mäeots is done hoping for a deal. “I like the saying that only the paranoid survive in business. If Magnetic did business based on hope, we would have closed shop ages ago. We are no longer hoping for anything. We will move on with our plans even in case of a hard Brexit, and our plan will not benefit the UK,” he added. Mäeots said that Magnetic MRO has already made much of the decisions it needs to make, and change is for the better in the end.

“For example, nothing will happen if we have to do business under some other country’s certificates. Deal or no deal, we have made our decisions and the train has left the station. Like many other major companies, we could not stay in that limbo and had to make our decisions,” the CEO explained.

Unintelligible policy

Asked whether this means Magnetic will move its production away from the UK, Mäeots said he cannot comment at this time. “A good comparison here is that if you tell your employees they might get paid but they also might not, they will leave.

The same goes for companies who are told that they might or might not get a deal. We decided to act and not place our hopes on a deal. That entire policy is so unintelligible.

He added that there will be an organic correction for other Estonian companies. “Everything depends on what kind of customs fees we’ll see. I’m more worried about capital markets. European business is being funded from London, and that is a much bigger problem. If you are looking to finance your business, the UK is the first place you go today,” he said.

Member of the board of customs agency 4U Logistics OÜ Andreas Part said that major manufacturers have turned to them as they do not know what is about to happen. “Here is where we need to stay calm because even Boris Johnson doesn’t know what kind of Brexit they’ll have in the end,” he said. Part added that while administrative burden would grow, companies already do business with third countries and would be able to manage the UK. “I would recommend firms that have only done business with the UK so far and have not come into contact with third countries do their EORI registration so they could be eligible for customs clearance,” he suggested.

Part also said companies should look at what they are importing and determine where tax rates would be highest. “Importers would do well to study worst case scenarios,” he said. The head of 4U Customs urged everyone to stay calm. “Companies are successfully doing business with third countries today, so everything’s possible,” he said.