UK/EU customs checks
Traders who are used to moving goods freely to the EU will need to adapt. They will have new requirements for paperwork and their goods could face significant checks at the EU border. Supply chains that are optimised for speed and fluidity will need to find the space and time for customs authorities to carry out checks and inspections.
Action: Estimate how long (project days) will be required to implement custom procedures for non-EU markets.
Potential delays at UK/EU border
Researchers at Imperial College London estimate just two extra minutes of checks could more than triple the existing queues at ports. The government could relax efforts to collect border taxes to maintain the free movement of imports and exports in the event of no-deal.
Action: Evaluate the cost of potential border delays to just-in-time deliveries, SLA agreements.
Buffer inventory costs
Cost of holding additional inventory and warehousing
Tariff implementation cost
The UK needs to address how it will manage the movement of goods in and out of the country following Brexit. The treatment of goods at the UK border has been determined in Brussels for past decades. Outside of the EU, the UK will face potential barriers to trade and while some of these may be reduced or eliminated by negotiations, a new and expanded system of customs will be needed. Business will need to adapt their systems to interface with new government systems, yet what is needed and how it will work is not yet agreed.
Action: Evaluate how long (project days) will be required to implement business process and system changes e.g. to support HS codes, customs, tariffs.
Tariff impact on cost base
If Britain exits the EU without a deal, it could lose access to dozens of trade agreements. Until fresh agreements could be struck, exports and imports to these countries would fall under World Trade Organisation rules and be subject to tariffs. This risk covers the Impact of applying Most Favoured Nation (MFN) tariff on cost base. Under WTO rules, traders would pay the applied MFN [most favoured nation] tariff, applied equally to all countries without trade agreements.
Tariff impact on sales
If the UK fails to agree a new trade agreement with the EU then trade between the UK and the EU would be governed by World Trade Organisation (WTO) rules. The UK would pay tariffs on goods and services it exported into the EU, but since the UK would pay ‘most favoured nation’ rates, that would prohibit either side imposing punitive duties and sparking a trade war. These WTO tariffs range from 32 per cent on wine, to 4.1 per cent on liquefied natural gas, with items like cars (9.8 per cent) and wheat products (12.8 per cent) somewhere in between. The bigger threat to the UK exports would not be from WTO tariffs, but other EU states imposing new regulations and other ‘non-tariff barriers’ to keep UK services out.
Action: Assess the impact of applying MFN tariff on sales
ROO Compliance cost
Rules of origin (ROO) are how customs authorities classify where an export has come from in international trade. In a no-deal Brexit, British firms would be exposed to a combination of administrative and compliance costs linked to rules of origin, ranging (based on existing estimates) from 4 percent to perhaps 15 percent of the cost of goods sold. Prepare by:
- registering with HMRC as an exporter, and obtain an EORI number – register for the REx system;
- review your current bill of materials and assess whether your goods would currently meet origin thresholds;
- identify the origin of your component parts and where Brexit will cut across your supply chain.
ROO impact on Sales
Rules of origin (ROO) are an essential part of a free-trade agreement made with another country to make sure a third country is not piggybacking the deal. If you allow a car in tariff-free from country A but 80% of parts in the car come from country C, then you’ve given away a benefit to country C for nothing in return. Trouble is, cars made in the UK are so dependent on EU parts that we would struggle to satisfy ROO when we try to strike post-Brexit trade deals.
Action: Assess the Impact on sales of rules of origin requirements
EU trade agreements with third countries
The UK currently benefits from the terms of trade agreements, and other trade-related agreements, that the EU has with countries outside the Union. There are c.40 agreements with about 70 countries. Ten of the UKs top 50 export markets for goods are covered by these agreements. Impact of the loss of existing EU trade agreements and preferential duty rates on imports/export costs and or sales.
Customs facilitations, reliefs etc
Authorised Economic Operator (AEO) status is an internationally recognised quality mark. To qualify, businesses must be able to demonstrate that they have both the policies and physical arrangements required to guarantee that goods have been transported securely and are properly accounted for.
Action: Assess how long (days) it will take to achieving AEO or trusted trader scheme status, if appropriate to the business.
Customs/ export training
After exit from the EU, there will be 180,000 traders, from individuals and microbusinesses to large organisations across different industries, who will need to make customs declarations for the first time. Customs professionals are a precious commodity. The UK does not have the right skills are right number of people with the required skills needed to deal with the challenges that Brexit will present in regards to the impact of new customs controls and checks. Businesses need to be able to either train or recruit employees with the customs skills and understanding needed to ensure their processes and customs regimes are compliant and up-to-date.
Action: Evaluate the cost of acquiring the required customs and export knowledge, e.g. through training, recruitment or external support
Intra-EU trade is currently exempt from VAT payments. Brexit poses a cash flow problem for trading companies because VAT will be charged at the border when importing goods and services. Cash flow problems will be compounded for companies that need to hold additional inventory as insurance against potential delays at borders.
Action: Assess the impact on order flow, supply chain, tax (VAT) on working capital, cash flow; Eligibility for a VAT deferment account
VAT registration in the EU (services sector)
This risk describes the cost of setting up and administering VAT in EU states for the supply of services. After 29 March 2019 if there is no deal, there will be implications for:
- UK businesses importing goods from the EU;
- Accounting for import VAT on goods imported into the UK;
- VAT on goods entering the UK as parcels sent by overseas businesses;
- UK businesses exporting goods to the EU;
- UK businesses exporting goods to EU consumers;
- UK businesses exporting goods to EU businesses;
- UK businesses selling their own goods in an EU Member State to customers in that country; and
- UK businesses supplying services into the EU.
Businesses need to ensure that they protect against currency risk. The risk is that that you can end up paying more for imports or receiving less for exports. It pays for all businesses to be currency risk aware. The first step in managing currency risk is to understand and quantify the actual and potential exposures that your business is running, then decide on the risks that you wish to run. Ways to manage currency risk include adopting dual invoicing, forward contracts, foreign currency accounts.
Action: Investigate the cost of hedging against currency movements.
EU regulatory regime
Following Brexit the UK will no longer fall under the EU regulatory regime and, in a worst-case Brexit scenario, British products such as chemicals, pharmaceuticals or food stuffs would not be authorised for sale, and UK financial firms would lose their passporting rights.
Action: Assess the impact of regulatory changes on EU sales
Cost of Compliance
Regulation, like so many issues, remain in the balance as Brexit negotiations continue. The UK and the EU start Brexit negotiations from a unique position, with complete convergence of rules. However the EUs approach to countries outside its single market is based on co-operation between regulators rather than a blanket acceptance of the others rules.
Action: Evaluate which regulatory agencies you work with now and will need to post-Brexit. Assess the costs associated with complying with multiple regulatory regimes.
Intellectual property protection, including patents, trademarks, registered designs and copyright could all change after Brexit. European patents will still apply in the UK but other IP areas, such as trademarks and designs, may lapse after Brexit. A Brexit deal would continue existing intellectual property protections, giving the UK time to put in place an alternative.
Action: Estimate the cost of protecting IP rights post-Brexit and the risk of lost sales/revenue if you fail to correctly administer rights.
Contractual consequences for costs
It is possible that the consequences of a no-deal Brexit, for example changes in exchange rates or deterioration in the economic prospects of a business, could satisfy specifically defined Materially Adverse clause triggers. It is also likely that some specific aspect of the Brexit process, such as regulatory change or imposition of tariffs could trigger generic clauses. Consequences could include a right for one, or either, party to terminate the contract.
Action: Evaluate potential consequence of contractual position as a result of UK leaving the EU and estimate the impact on costs.
Contractual consequences for sales
Whether or not Brexit provides grounds for termination will depend on the terms of the particular contract. Parties might try to rely on material adverse change or force majeure clauses as grounds for termination.
It is even possible that parties may seek to rely on the doctrine of frustration, claiming a contract has become incapable of being performed as a result of Brexit.
Action: Review your contracts. Consider the impact of MAC and force majeure clauses. Estimate the potential for increased costs or lost sales / revenue as a consequence of contractual terms and conditions, including applicable regulatory and legal arrangements.
Immigration status of EU employees
Companies will need to understand the rights and status of all of their EU workers to ensure they are employing them legally after the UK leaves the bloc. Businesses will need to monitor their workforce in terms of where they work, their immigration status and regularly review their employment contracts.
Action: Assess the number of staff eligible for EU Settlement Scheme.
Cost of supporting staff through Settlement scheme
Around 3.6million EU nationals currently live in the UK, including nearly 600,000 children. The government has confirmed all EU nationals living in the UK will now be able to gain ‘settled status’ and stay here indefinitely.
Action: Evaluation the cost of supporting staff applying for the settlement scheme.
Future staffing requirements
This risk covers the number of staff who leave despite extension of rights. ONS figures suggest an increase in the number of EU citizens leaving the UK to return home permanently and a fall in first-time EU entrants to the UK job market. This negative trend is particularly pronounced for Central Europeans. Some industries depend on migrant workers: The British Summer Fruits trade body said its members were 10% to 15% short of labour in 2018 and expected to be more than 30% short in 2019.
Action: Assess the percentage of your staff from the EU and where practical evaluate their intentions.
Cost of recruitment
The uncertainty caused by the UKs decision to leave the EU is being felt on the ground by recruitment and talent professionals, with around a fifth noticing an increased cautiousness in prospective candidates and around the same proportion seeing evidence of an increased cautiousness in organisations recruitment.
Action: Assess the cost of skilled resource recruitment reflecting likely changes in supply, increased on-boarding times.