Risk & Economy » Brexit » Report: SMEs turn to tech to handle post-Brexit customs complexity

Report: SMEs turn to tech to handle post-Brexit customs complexity

Untapped SME trade – valued at £290bn – hampered by new Brexit requirements as businesses struggle to adjust supply chains

The UK-EU Trade and Cooperation Agreement (TCA), which was agreed on December 24, 2020 and implemented 8 days later, has been met with criticism from all angles.

“Brexit is costing the UK economy a lot of resources and money to cope and in adjusting supply chains to the EU,” says Alexander Altmann, partner at Blick Rothenberg. “I don’t think the UK will be able to recover what its currently losing with the EU with what it may gain from new trade deals with the US, China and Australia.”

Uncertainty has grown among businesses and caution “is definitely the prevailing attitude at the moment”, according to Rob Hutchinson, senior VAT recovery and research associate at TMF Group. There’s no room for trial and error because it can “lead to quite a big cost in terms of financial penalties”.

Businesses overburdened by new measures

Many businesses found the new regulations and requirements “particularly challenging”, with rules of origin and sanitary and phytosanitary checks “significantly adding to the complexity for certain businesses”, said Amanda Tickel, head of tax policy and Brexit lead at Deloitte, in an email.

“From a practical perspective, businesses are seeing higher haulage costs and congestion at some borders in the short term.”

“It’s a burden of administration all the way through the business,” says Geoffrey Betts, managing director at Stewart Superior, a Buckinghamshire-based stationary wholesaler.

“Our monthly turnover has gone purely on administration costs of setting all this up. It’s just an increased cost on everybody.”

Some businesses applied for Authorised Economic Operator Customs Simplification (AEOC) and Authorised Economic Operator Security and Safety (AEOS) status’ which provide businesses with several customs simplifications. Among them, are reduced customs checks and priority treatment for consignments in customs controls.

“This helps businesses to manage the efficiency of their supply chain, although traffic congestion or other practical issues with specific borders could still disrupt operations,” said Tickel.

However, businesses with AEO status may have to wait to before seeing the benefits.

“As has been the case for many elements of the UK-EU Trade and Cooperation Agreement there has been no time to implement practical steps on the ground,” she said. “It may take several months to build the capacity to identify and facilitate movements for AEO-accredited businesses.”

As part of the trade agreement, businesses also needed to get to grips with the new establishment requirements. To access both UK and EU markets, companies need to have some form of establishment in the other jurisdiction.

Critics argue the deal could form a rift between the larger companies who can absorb the costs and smaller companies who may decide it’s simply not worth it.

“For small and medium sized manufacturers in the UK, they are finding it very difficult at the moment to understand the new rules, to find the right advisors in the European Union, and to justify all the costs that are involved,” says Blick Rothenberg’s Altmann.

Changes to VAT recovery compliance means businesses will have to store hard copies of original documentation – something many SMEs have never done before, says TMF Group’s Hutchinson.

“In reality, people just aren’t going to be keeping all these receipts. A lot of businesses will decide it’s not worth the hassle.”

“Where you’ve got huge multinationals incurring significant amounts, they will continue to make sure that they can get back everything that they’ve incurred. But for a smaller business, they’ll probably make a business decision that the cost of administering the process will actually end up cancelling out the VAT that they could reclaim.”

In February, the government announced a £20m SME Brexit Support Fund to help businesses adjust to new customs requirements, rules of origin and VAT rules when trading with the EU.

“These changes are not going away and understanding of the new trading environment needs to become a fundamental part of businesses’ operations,” said Tickel.

Reimagining the supply chain

New customs requirements, rules and delays at the border have forced many businesses to re-evaluate their supply chain.

“You’ve got two choices as a business,” says Stewart Superior’s Betts. “You either stay as a UK company and incur all those burdens, additional costs and hassle. You can invest in your administration or you can open a company in Europe and become part of the market.”

Some EU businesses have decided to establish a base in the UK for the same reasons, said Tickel.

Stewart Superior decided to open a warehouse in the Holland on December 4. By the end of the transition period, they had completed all the paperwork for their new distribution warehouse.

“It was a phenomenal effort. We managed to ship goods into the warehouse before the end of the year. It now gives us the huge opportunity to grow our business in Europe on an online basis.

“If we hadn’t done that, it would have been a nightmare.

“It’s not a choice that everybody will be able to make but it is possible. We’re investing in the future of a company and I believe it’s the right decision we’ve taken,” says Betts.

For some businesses, like the Cheshire Cheese Company, this was not a feasible option. Instead, the company decided to revaluate its export strategy.

“I’m potentially looking at abandoning exporting to the EU,” says co-founder Simon Spurrell. “We’ve had to stop anyway since Christmas. Let’s just concentrate on markets we can access easily without any documentation.”

Prior to Brexit, exports to the EU accounted for around 20 percent of the Cheshire Cheese Company’s sales. However, due to the new requirements, the company is looking at winding down its European business altogether to focus on exporting products to North America.

“We’re completely at a disadvantage,” he says. “We haven’t got the funds available to be able to have a second distribution like the bigger multinational companies who already have bases in Europe already.”

Opening up trade opportunities

Businesses reliance on automated software has grown as companies look to mitigate the fallout from the pandemic and Brexit, according to software vendors.

“Having a strategy that embraces digital tools is an essential component to any business looking to grow and succeed,” said Pauline Green, head of product compliance at Intuit QuickBooks, in an email. “Seemingly simple tools can have a profound effect on productivity, by reducing the time spent on admin burden and therefore allowing business owners to focus on important tasks, such as ensuring they are EU compliant.”

In fact, 41 percent of SME owners say online tools have enabled them to target new markets at home and abroad, according to research from an upcoming report from Xero.

Brexit has also given software companies the opportunity to engage and support customers, says Adam Prince, vice president of product management, compliance and Brexit at Sage. Research conducted by Sage and Capital Economics found that untapped SME trade has the potential to generate £290bn annual post-Brexit boost to the UK economy, almost twice as much as the current level.

“Technology and automated software in particular – like e-commerce platforms – have undoubtedly opened up trade opportunities for small businesses, allowing them to trade both in the UK and further afield,” said Donna Torres, director of small business at Xero, in an email.

Traders relying on grace periods

The Northern Ireland Protocol was announced in December and allows for borderless trade between the Republic of Ireland and Northern Ireland.

The Protocol has largely succeeded in keeping most goods moving from Northern Ireland to Great Britain, said Deloitte’s Tickel. But there are still challenges for businesses moving goods from Great Britain to Northern Ireland.

“The UK Government hasn’t been very good with providing enough guidance,” says Altmann. “The trader support service, which is supporting English, Welsh and Scottish companies that sell into Northern Ireland, is not really working. They have to start putting a lot more effort into solving these problems with trade between the British regions in Northern Ireland.”

Grace periods were put in place to provide arrangements for movements of parcels and temporary solutions for chilled meat products. This is to allow businesses to get to grips with new requirements and regulations.

However, not all traders qualify for the “sanitary and phytosanitary” grace period, said Tickel.

“There are particular difficulties moving agrifood products and those in mixed consignments or grouped loads due to the volume of certificates required, the lack of official veterinarians, and the fact that a single mistake can hold up a whole lorry.”

The grace periods are set to end in the coming months with the earliest being April 1, for parcels entering Northern Ireland and July 1, for chilled meat products. At the beginning of February, cabinet minister Michael Gove wrote a letter to European Commission vice-president Maroš Šef?ovi? asking for an extension to the Northern Ireland grace periods.

Since Northern Ireland is half inside the EU and half inside the UK, “you have to deal with VAT and customs reporting requirements to serve both sides,” says Altmann. “If you trade with Northern Ireland, you might have to file two tax declarations one with the European Union and one with the UK, that’s just one example of how complicated it has become.”

Despite reaching an agreement, tensions between the EU and the UK are still high.

“The EU’s quickly withdrawn decision last month to invoke Article 16 of the Northern Ireland Protocol and introduce border checks in relation to the Covid-19 vaccine has demonstrated the ongoing tensions in respect of apply the protocol,” said Tickel.

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