Risk & Economy » Brexit » Brexit and supply chain – businesses need to act now

Brexit and supply chain - businesses need to act now

Malcolm Joy, tax partner from BDO, kicks off a series of articles looking at how businesses can prepare for Brexit. Understanding how supply chain will be impacted by Brexit is a one way businesses can ensure they're ready

Malcolm Joy, tax partner from BDO, kicks off a series of articles looking at how businesses can prepare for Brexit.  While there will be uncertainty in the months and years ahead, there are steps that businesses should be taking now to ensure that they are well prepared for any outcome. Understanding how your supply chain will be impacted by Brexit is one such step.

 

One year on from the EU referendum and the one word that you will hear commentators apply to Brexit is the word ‘uncertainty’.

No-one knows how negotiations will turn out and behind the rhetoric there is, understandably, a lot of hedging of bets from policymakers and economists and who can blame them? No-one can definitively say what the final destination of the negotiations will be, both in terms of the rules around international trade and what the impact will be on the UK economy.

It brings to mind the story of former US President, Harry Truman, who, in a bout of frustration, once shouted “give me a one-handed economist. All my economists say ‘on the one hand…on the other’”.

In the same way, business leaders crave some certainty and clarity on what direction the negotiations with the EU are going in, in order to plan effectively.

It’s clear that businesses are going to have to accept the uncertainty, but accepting it does not mean waiting on the side-lines for clarity to emerge. It is vitally important that businesses plan for flexibility.

One key area for businesses to consider is their supply chain. Many UK businesses that have built their business models on access to the EU single market will have complex EU supply chains, involving cross-border movements of components and goods, often back and forth before sale.

A good example of the problems that face UK business is the ‘Bentley bumper’. The bumper is made in eastern Europe, before being sent to Crewe for further work, then on to Germany for finishing and finally back to Crewe before the finished car rolls off the production line.

If this feels complicated, then imagine the sandwich-maker who transports perishable foodstuff across borders, for sale in the UK. In this example, time is of the essence and tax implications will not be the only focus of concern, as the ‘just in time’ nature of their supply chain arrangements will be equally worrisome.

Multiple cross-Channel road trips like these highlight how manufacturers and suppliers in Britain and the EU are intertwined. After Brexit, such cross-border movements are likely to trigger cumulative tax costs and encounter non-tariff barriers. The potential for new hard borders is also likely to introduce friction into the supply chain.

What are the issues to look out for? 

Within the EU, most goods are in free circulation, can be brought into the UK with minimal customs control and there is no customs duty or import VAT to pay.

In contrast, imports of goods from outside the EU generally require an import declaration to customs and payment of customs duty and import VAT before the goods are allowed to enter the UK.

Post-Brexit, arrivals of goods into the UK from EU countries will almost certainly become imports for indirect tax purposes.

Goods will take longer to import as they will need to pass through UK customs procedures.

Instead of accounting for acquisition tax on the VAT return, import VAT would be payable on arrival of the goods and there may also be customs duty liabilities, the latter representing an absolute cost.

While deferment and warehousing procedures may be available to mitigate cash flow, these will require additional administration to ensure compliance.

There are also a number of simplifications that are currently applicable to suppliers within the EU, such as triangulation, supply and install, call-off stock and a threshold for distance selling, that may no longer apply.

It is likely that these simplifications will no longer be available to UK suppliers after Brexit and it may be necessary to register for VAT in additional jurisdictions, irrespective of the scale of the UK suppliers EU activities.

Then there is an issue around VAT which, in EU member states can currently be recovered using a simplified EU electronic system. Once the UK leaves the EU, this procedure may no longer be available to UK entities. Companies will instead have to use the lengthy paper-based reclaim process set out in the 13th Directive (assuming that UK businesses will be granted access to this refund mechanism).

If nothing else, the key point to remember is that, following Brexit, the administrative burden on UK businesses bringing supplies in from the EU is expected to increase.

What should businesses do to prepare?

The first step is to take a long look at your supply chain and evaluate your exposure to EU VAT and any likely additional administrative burdens. Assume the worst case scenario and then apply that to your business.

Your adviser will be able to help you understand where the pinch points are and what action plan you can develop to mitigate disruption to your business, such as registering for VAT in other jurisdictions or applying for a Customs warehousing authorisation to suspend customs duty and import VAT on goods imported from the EU.

The issue is complicated and uncertain but is precisely because of that, that businesses need to be thinking about it now.

Businesses that get their supply chains in order now and are flexible enough to adapt to the final outcome of the EU negotiations will gain a competitive advantage and that is worth planning for.

 

Malcolm Joy is tax partner at top ten accountancy firm, BDO.

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