However, in recent updates his rhetoric has shifted. Trump has now declared that he will target countries that impose VAT on US goods.
So, what are the potential risks for UK exporters and how can they plan ahead? Here our VAT Consultant, Nicola Gladwell considers these key areas.
What we know so far
Trump’s tariff strategy focuses on countries with large trade deficits with the US, as well as those that apply higher tariffs on US goods compared to what the US charges them.
The UK and the US both claim trade surpluses with each other, though discrepancies in data collection make this complex. This could potentially exclude the UK from the “reciprocal tariffs” framework.
However, Trump recently argued that VAT systems function like tariffs on US goods. Since the UK applies VAT on a broad range of goods — including those imported from the US — this could open the door for reciprocal tariffs between the UK and the US.
There will be much for the US to consider in this decision. For example, whilst import VAT is levied on all goods (not just from the US), it is usually VAT neutral for trade transactions and does not create an additional cost to overseas businesses or their UK customers. So, we hope it does not have a bearing on the tariff decision.
On the other side of the coin, e-commerce brands who sell to end consumers in the US are at an advantage to local US suppliers, who are subject to sales / state taxes, whereas any supplier (including from the US) of goods to EU/UK consumers is liable to VAT on these sales, either at import or on a subsequent domestic supply. So, in a B2C context, there may be a discrepancy.
What could US Tariffs mean for UK exporters?
Trade between the UK and US is worth around £300 billion per year, and whilst the direct impact of tariffs to UK businesses may be confined – since most British exports to the US are services (finance, consulting, and insurance), which are typically less affected by tariffs than goods, some sectors could face severe consequences.
Analysis by the Centre for Inclusive Trade Policy suggests that a hypothetical 20% tariff on all UK exports to the US could result in a £22 billion drop in sales, particularly harming industries such as fishing and mining.
The UK automotive and pharmaceutical sectors, which export £8 billion worth of cars and £6 billion worth of pharmaceuticals to the US, would also face significant challenges.
With UK employers already bracing for the financial strain of increased employer National Insurance Contributions, for those reliant on US sales, this could put even more pressure on their bottom line.
What if the UK avoids US Tariffs?
Even if the UK avoids direct tariffs, disruptions to global supply chains could still impact British businesses.
With the EU, the UK’s largest trading partner, potentially facing tariffs, prices for many EU goods (both consumer and business-related) may rise. This could force UK manufacturers with European and North American supply chains to rethink their production and export strategies.
On the flip side, overseas businesses looking to sidestep US tariffs may turn to the UK as an alternative market. An influx of imported goods could lower prices for consumers, but it would also increase competition for UK based firms, potentially putting pressure on profits.
Furthermore, if the UK avoids tariffs, we could see an influx of overseas companies setting up in the UK and a potential revival in UK manufacturing, positioning us as a key hub for businesses looking to access the US market.
How can UK exporters plan ahead?
While it remains unclear if or when these tariffs will be introduced, UK exporters must not overlook the possible financial consequences.
In addition to assessing their supply chains and pricing strategies, the tax implications could have a substantial impact on businesses that export to the US. Key areas you should consider include:
- VAT recovery and cross-border tax structuring: If UK exporters can optimise their VAT and cross-border tax structures, they could potentially mitigate the financial burden of US tariffs. Proper tax planning, such as setting up subsidiaries and exploring VAT and duty reliefs, might help reduce the impact of cross-border transactions.
- Transfer pricing impact: UK exporters may need to review their transfer pricing strategies to align intercompany transactions with new tariff-related cost structures. Adjusting pricing models could potentially manage tariff costs and ensure compliance with tax regulations.
- Cash flow management: By forecasting the impact of tariffs on cash flow, UK exporters may be able to work out the potential impact on pricing strategies or diversify their supply chain in time to offset the added costs. This proactive approach could help preserve working capital and maintain financial stability.
- US presence and tax incentives: In some cases, it could be worth exploring whether establishing a US presence could allow a UK exporter to reduce exposure to tariffs and take advantage of local tax incentives. Setting up a subsidiary might open doors to potential tax advantages and optimise their position in the US market, albeit with an investment and commitment required.
- Leveraging wider tax reliefs: If UK exporters were to explore wider tax reliefs available to them, such as R&D credits or US state-level incentives, they could potentially reduce the financial impact of tariffs. Identifying these opportunities with expert advice could ease the overall burden on their tax liabilities.
Early preparation is key for UK exporters
Rather than waiting for policies to be finalised, UK exporters should prepare for the possibility of tariffs by reviewing their tax structures and supply chain, and where necessary, seek professional tax advice to explore VAT strategies and tariff mitigation options.
If you would like to discuss any aspect of this article or how we can assist your business, please do contact us.
With a career in VAT spanning over 20 years, Nicola advises businesses of all sizes; from start-ups to major international organisations.
