There are less than XX days to go to the end of the Brexit transition period. At this point in time we don’t know whether there will be a positive trade deal, resulting in zero tariffs and no quotas, or a no deal where tariffs become part of the UK’s everyday trade with the EU27. In either event, there is likely to be considerably more friction in supply chains than there is currently.
The level of Brexit preparation varies significantly between businesses. The pressure of diminishing time has raised several common concerns and considerations over recent weeks, many having already completed Brexit assessments with KPMG.
International commercial terms (incoterms) are a set of pre-defined rules published by the international chamber of commerce relating to international commercial law. They help structure the balance of risks between buyers and sellers. Each incoterm will allocate specific responsibilities including, for example, who does the import and export documentation and who pays the tariff - buyer or seller. For many organisations, this is a new process and feels complex. The instinct is to pass this complexity upstream to the supplier, whether more mature or less; larger or smaller.
Incoterms are critical in negotiating prices with suppliers, protecting margin and managing risk. They are an opportunity for a reset and to get clarity with key EU27 suppliers
Businesses also need to consider the triangulation between what incoterms you may have on the system, what is in the contract and what has been set up operationally i.e. what your operations think is happening. Systems often have a default incoterm setting which is not always helpful.
2. Customs Declaration Capacity
Most clients who import or export have had their discussions with freight forwarders. However, having discussions is different to getting the contract signed. You need to know where your customs declaration capacity is coming from and at what cost per transaction. The friction associated with the need to complete customs declarations will exist whether the UK has a trade deal with the EU or not. The market does appear to be tightening, even though the government has made £50million available to help businesses with recruitment, training and supply of IT equipment together with £84million to help grow the customs intermediary market.
Make sure that you get agreements in place with service providers and obtain the training, IT equipment and software to reduce the friction. The customs declarations are a legal obligation that will be required for UK/EU trade - make the preparations to be compliant now.
3. Northern Ireland Flows
Many of our clients are seeking greater clarity on the position of their product flows into NI and ROI. The Northern Ireland protocol describes how the border will operate at the UK ports, with customs declarations required for both the Republic and Northern Ireland. If goods entering Northern Ireland are deemed to be ‘at risk’ of entering the Republic then tariffs will be payable at the UK ports. Goods within the island that are in free circulation should be able to flow freely between NI and ROI.
Given these varying treatments, sharing inventory pools between NI & ROI becomes more difficult and there is increasing realisation that the border will be at the UK ports. We have found some clients have not put in place the necessary customs declaration capacity for the change. Another common challenge has been where customers have requested incoterms changes at short notice and commercial teams have been unaware of the supply chain costs involved, resulting in margin erosion on goods destined for Northern Ireland.
4. VAT Guidance
Several businesses have found that as they negotiate new terms of business with both suppliers and customers, they realise that they end up owning goods in other jurisdictions in which VAT may be liable. This may require registration with overseas tax authorities. Alternatively, there may be situations where less mature suppliers unintentionally end up not complying with HMRC rules or those of other national tax authorities. This can lead to VAT as an unwelcome cost in the supply chain unless a compliant solution is sought.
5. Preparation of UK Suppliers
Many businesses have reviewed their Brexit mitigation plans and have a good handle on their internal processes. However, a common area of weakness is often their suppliers and how well prepared are they. With rapidly diminishing transition time remaining, the focus tends to be on the critical flows rather than just value or volume. While many larger suppliers have openly communicated what they are doing, other, seemingly less fundamental, suppliers have gone under the radar screen. A good example of this is the supply of critical spares; when plant and equipment breaks down it is useful to understand where the spare parts come and whether they are stocked in the UK.
Taking a holistic view
Companies’ approach to Brexit requires a holistic ‘cross business’ view. Effective solutions will only emerge where supply chain, indirect taxation and other areas of the business are in sync with one another.
Organisations need to think about their longer-term commercial landscape, for while there will be challenges, there will be opportunities too. As the transition period ends, many competitors will find themselves disadvantaged in the UK economic environment, which creates opportunity for some.
We bring together specialists across many disciplines to help accelerate responses to the imminent changes on 1 January 2021. As importantly, we also help shape the future solutions that support develop businesses’ marketplace in the post Brexit landscape.
Explore your own level of preparedness with our Brexit Risk Assessment.