The Government has published a series of technical notices explaining how to prepare for a Brexit ‘no deal’, providing the much-needed jolt to encourage manufacturers trading in the EU to start planning for the worst. How should they prepare? Can they afford to put off decisions that carry significant cost implications any longer?
Since the EU referendum, manufacturers have been dealing with the potential that current trading arrangements with EU-based customers and suppliers could change drastically on or from the 29 March 2019. The closer the UK gets to leaving the EU, the more concerns arise around the lack of clarity for what the future might hold.
Wait and see approach could be bad for business
Many small and medium sized businesses have up until now adopted a ‘wait and see’ approach; in the belief that the Brexit negotiations will reach a mutually beneficial outcome, rather than planning for the worst and creating detailed contingency plans.
To avoid being caught with no time left to prepare, manufacturers must heed the warnings and start thinking ahead. The first step is to work out exactly how a Brexit ‘no deal’ could impact their business based on current trading activity. Understanding the full implications of this scenario is crucial, as well as being aware that they could lose orders if EU-based corporates view them as too costly, or too difficult to deal with in the future.
Importing goods from EU
There could be a heightened risk of cash flow difficulties such as,
- Customs duties and import tariffs could become payable on the cost of imported goods from the EU in the event of a Brexit ‘no deal’.
- VAT could be payable at the point goods enter the UK. Although businesses could claim back this VAT in time, the need to make payments upfront could impact cash flow.
- If there are extra border checks, there may be a requirement to hold additional stock to ensure customers delivery expectations can be maintained, increasing stock holding cost.
To manage this, it may be necessary to recalculate the businesses working capital requirements to ensure sufficient cash is available as and when needed.
Exporting goods to EU
There are also a number of potential barriers to consider when exporting to EU:
- There may be some form of trading disruption due to customs delays and border checks. There may be a potential requirement to complete customs declarations and this administrative burden should be factored in to delivery timeframes
- In the event of a Brexit ‘no deal’, excise duty and tariffs would become payable on certain goods
- It may be necessary to register for a UK Economic Operator Registration and Identification (EORI) number to facilitate the exporting of goods, although the Government has said it is not necessary to go this far just yet.
When importing or exporting, manufacturers should consider how a switch to World Trade Organisation tariffs, and their corresponding commodity codes, could affect their business model. Seeking advice from the HMRC tariff information and codes could aid this process. Additionally, the Government’s technical notice entitled ‘Trading with the EU if there’s no Brexit deal’ suggests that some businesses may need to consider appointing a customs broker, freight forwarder or other logistics provider to produce advice on the submission of customs declarations, as this could become a requirement depending on their trading activity, resulting in administrative burden and cost. If businesses decide not to use a third party in this way, they would incur other costs for new software and have the challenge of sourcing the necessary authorisations from HMRC, further increasing pressures on cash flow.
Is now time for those with trading relationships in the EU to start investing in preparation efforts for a Brexit ‘no deal’?
This will come down to the level of specific cost and risks the business is exposed to. Either way, businesses should be gathering information on how exactly they may be affected and the costs they could incur. Carrying out cost modelling will identify where pinch points arise and will help to detect cash flow issues. Steps should also be taken to strengthen cash reserves and seek to renegotiate contractual terms and conditions in order to mitigate risk and preserve their current trading position as far as possible.
Keep informed for the future
Keeping up to date around the latest Brexit information is crucial. This can be achieved by signing up to the Government’s EU email updates and manufacturers should network with relevant trade associations to ensure they are receiving any guidance available. By taking this approach early may open up opportunities in the future. For example, exploring possibilities for businesses to collaborate and gain competitive advantage by putting increased volume through a single logistic provider.
Be ready to act
Manufacturers can no longer afford to put off planning for the worst case scenario and the technical notices should be seen as a call to action. While it is always going to be difficult to sign off on large investments until the need arises, businesses can and should create contingency plans now, so they are ready to react if the worst happens.
Caroline Milton is a Partner and manufacturing sector specialist. To talk through the impact of Brexit on your manufacturing business plans, contact her by phone on +44 (0)1372 366173 or via email on CMilton@menzies.co.uk.