The shape of any future Brexit deal between the UK and the EU remains unclear. Only 29% of UK businesses have been able to plan for Brexit, according to research from ICAEW, and just 43% have held meetings to discuss the risks and opportunities.
Most UK exporters, who have benefitted to some degree from the fall in the value of the pound since 2016, don’t want to see the introduction of tariffs and a new customs regime at the border with the EU. A hard, “cliff-edge” Brexit, with the UK moving to use World Trade Organisation (WTO) rules in the absence of trade deals with the EU or any other countries would increase their costs significantly.
Manufacturers’ organisation EEF is campaigning for “a smooth exit… that allows us to continue to trade fairly with European markets… to employ and deploy [staff] across borders in order to fulfil contractual obligations; and [to work within what is in effect]… a single regulatory environment”.
Whatever form it takes, Brexit will have implications for all UK businesses, even those not directly involved in cross-border trade and do not employ EU nationals. So what practical preparations can businesses make?
If your supply chain includes suppliers based in EU member states
Potential changes in customs procedures and the imposition of tariffs will affect UK companies importing goods from the EU. Even if your own business does not import goods from the EU, it is possible that some of your suppliers do, meaning they may face extra costs or operational pressures.
VAT is also an important consideration. “This is something on which there could be an agreement with the EU, but the working assumption is that as we leave, we will lose our intra-EU trading status,” says Anastassia Beliakova, head of trade policy at the British Chambers of Commerce. “VAT is recoverable, but this presents a cashflow issue.” She suggests businesses consider applying for the Duty Deferment Scheme, which allows for VAT to be paid in arrears, but requires a guarantee undersigned by the importer’s bank.
Brexit may also inspire more radical changes. By early November 2017 about 25% of UK businesses with more than 250 employees had already spent over £100,000 on some form of supply chain adaptation in anticipation of Brexit; and 40% were actively seeking to replace suppliers based in the EU with alternative suppliers in the UK or elsewhere, according to the Chartered Institute of Procurement and Supply.
Mark Essex, director of public policy at KPMG, stresses the need for businesses to plan a “shadow supply chain” that could be used if existing arrangements became unviable. “Just knowing what it would cost you to operate under WTO conditions is valuable,” he says.
He also references broader aspects of supply chain resilience. If Brexit causes delays at some UK ports, for example, how might this impact supplies coming from other parts of the world?
“Some businesses will switch to alternative suppliers, but a direct conversation with existing suppliers may also be productive,” says Matthew Rideout, director for business at ICAEW.
If your company exports to markets in the EU, or plans to
Unless the UK stays in the Single Market and the Customs Union, even a relatively “soft” Brexit will lengthen timescales and increase costs for most exporters. In the summer of 2017 the UK government published a position paper on the future of UK/EU trade, which estimated that a new Customs Declaration System would need to cope with about 200 million extra declarations per year, and would entail a major overhaul of IT systems at HMRC and within many businesses; along with recruitment and training of new personnel.
“Whatever happens after Brexit there will be a need for a physical declaration of some sort at the border with the EU,” says Robert Keen, director general at the British International Freight Association (BIFA). “That will increase costs.”
Businesses should certainly be considering the possible impact of the UK having to use WTO rules, which would entail payment of tariffs on exports to the EU in accordance with the EU Tariff schedule. They should also be considering the way that the Rules of Origin regime, which determines the economic nationality of a product, might affect them once the UK is no longer part of the EU.
Post-Brexit it may well also be necessary to complete a Single Administrative Document (SAD) when exporting into or importing from the EU. There are a number of different rules related to the SAD that apply currently to goods being brought into the EU and may apply to goods exported from the UK following Brexit, unless or until a new trade deal has been agreed.
One possible consequence is that more businesses may seek Authorised Economic Operator (AEO) status – an international quality mark that verifies the integrity of the company’s role in a supply chain and compliance with customs controls and procedures, and can enable fast-tracking of shipments through customs.
There may be other steps that businesses involved in a lot of cross-border activity can take to reduce operational and administrative costs, including opening subsidiary companies within the EU, employing more staff and/or buying or renting warehouse space within the EU; or altering strategies for the allocation of working capital, currency hedging, or tax planning. Accountants may prove valuable advisers for businesses in relation to some of these areas.
Accountants can help – but businesses must act now
Accountants may well have a useful contribution to make to help many of their business clients prepare for Brexit, in part because it is becoming more important for businesses to have a very clear view of trading activity.
“One thing we can say with some certainty is that since we voted to leave the EU the pound has depreciated significantly and that has had an impact on lots of businesses’ margins,” says Clive Lewis, head of enterprise at ICAEW. “They need to keep track, at least monthly, of how they’re trading, almost regardless of sector and size. I think accountants should make sure clients are comfortable with, or ask if they need assistance with, producing regular financial information.” Accountants may also be able to help businesses seeking to refine working capital, currency hedging or tax planning strategies.
Rideout urges businesses to start planning ahead now – and also to invest in their businesses, in readiness for the moment when the actual nature of Brexit does finally become clear.“Don’t continue to delay doing what you need to do to maintain competitiveness,” he says. “This must be an opportunity to reassess your cost base and where you can make changes in your business. Businesses should be looking at the opportunities that this turmoil might create.”
If you employ significant numbers of EU nationals
There are already indications that the supply of EU nationals coming to the UK to work is shrinking. Some EU nationals, including some highly skilled individuals who have been resident in the UK for more than five years may not have been convinced by verbal assurances from the UK government regarding their future residency rights.
Beliakova believes companies that employ EU nationals may need to consider implementing additional support for them, and for future recruits from the EU. UK companies should expect some skills or labour shortages. This will make it both more important and more difficult to retain staff.
“We may see companies offering more money or different benefits to staff,” says Essex. “Maybe paying non-UK nationals in a currency of their preference, whatever it takes, particularly if these individuals hold corporate memory.”
If you trade with countries with which the UK currently has a free-trade agreement through the EU
In November 2017 the government published proposals for a new Trade Bill that it hopes will enable the UK to continue to trade freely with countries with which it currently has a free trade deal through the EU. However, there is no guarantee that such free-trade agreements will come into effect immediately after Brexit or shortly afterwards.
“While there are some positive assumptions we can make about current agreements being rolled over through future agreements made with the EU, the only certainties for scenario planning are WTO tariffs,” warns Beliakova.
If you would like to benefit from future trade deals with other countries
Brexit will create new business opportunities, including the chance to trade on new terms with other countries. Emma Jones, founder of Enterprise Nation, a network that supports entrepreneurs and small businesses, suggests business leaders consider opportunities in countries where the UK might be seeking to strike new trade deals in the near future, such as the US, Canada, India and countries in the Middle East.
ICAEW’s Clive Lewis admits that planning is still difficult, because it remains unclear whether or not the UK will be trading on WTO or any other terms. “But you can still formulate some strategies,” he says. “You need to plan your methods of distribution and look at how competitive you are going to be. Building a strategy for markets to focus on in future istime well spent.”
If your company has no direct dealings with the EU
Some UK companies appear to have few or no trading links with the EU. But they should also be considering the potential impact of Brexit, says ICAEW’s Rideout. “Your suppliers may be UK-based, but Brexit may affect their costs and that may be passed on to you,” he says. “Also, if you make a component in a product that is ultimately sold overseas there may be pricing pressure on you, because your customer has tariff pressures to deal with. You need to understand customer, as well as supply chain, dependencies.”
Rideout suggests that some of these companies may also be able to benefit from other UK companies going through the process of reshoring their supply chains. Even if it may still be difficult to compete for this business on price, in some cases security of supply will be the decisive factor, he says.
Find more advice and information here:
Civitas research on post-Brexit trading costs for exporters
Rules of Origin information
Becoming an Authorised Economic Operator
VAT Duty Deferment scheme
KPMG Brexit resources
British Chambers of Commerce