The Government’s decision to publish a series of technical notices explaining how to prepare for a Brexit ‘no deal’ has provided the jolt needed to encourage manufacturers trading in the EU to start planning for the worst. But how should they prepare, and can they afford to put off decisions that carry significant cost implications any longer?
Ever since the EU referendum, manufacturers have been living with the possibility that trading arrangements with EU-based customers and suppliers could change significantly on or after 29 March 2019. The closer we get to the date when the UK leaves the EU, the more concerned they are becoming about the lack of clarity that exists about what the future might hold.
Instead of planning for the worst by putting in place detailed contingency plans, many small and medium-sized manufacturers have preferred to adopt a ‘wait and see’ approach; in the belief that the Brexit negotiations will reach an outcome that is mutually beneficial. With the publication of technical notices designed to prepare businesses for a Brexit ‘no deal’ however, it is becoming clear that the worst-case scenario is a distinct possibility.
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.
For manufacturers importing goods from the EU, there could be a heightened risk of cash flow difficulties. For example, customs duties could become payable on the cost of imported goods from the EU in the event of a Brexit ‘no deal’. VAT could also be payable at the point that these goods enter the UK. While manufacturers might be able to claim back this VAT in time, the need to make payments upfront could impact cash flow. To manage this, it may be necessary to recalculate the business’ working capital requirements to ensure sufficient cash is available as and when needed.
For manufacturers exporting goods to the EU, some form of trading disruption due to customs delays and a potential requirement to complete customs declarations should be expected in the event of a Brexit ‘no deal’ and excise duty would become payable on certain goods. It might also be necessary to register for an UK Economic Operator Registration and Identification (EORI) number, although the Government has said it is not necessary to go this far just yet. Businesses are being advised however to consider whether the potential changes to customs procedures would be beneficial or not, and whether delaying payment of customs duties until goods are ready to be released might be necessary.
Whether importing or exporting, manufacturers should also consider how a switch to World Trade Organisation (WTO) tariffs, and their corresponding commodity codes, could affect their business model. Seeking advice from HMRC could assist with this. 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 provide advice on the submission of customs declarations, which could become a requirement depending on their trading activity, adding administrative burden and cost. If businesses decide not to use a third party in this way, they would still have to pay for new software, further increasing pressure on cash flow, and source the necessary authorisations from HMRC.
So, has the time come for manufacturers with trading relationships in the EU to start investing in preparations for a Brexit ‘no deal’? This will depend on their level of exposure to specific risks and costs. However, they should be finding out more about exactly how they might be affected and how much it could cost them. They should undertake cost modelling to identify any pinch points that, if left unheeded, could get them into cash-flow difficulties. They should also take steps to bolster cash reserves and seek to renegotiate contractual terms and conditions in order to mitigate risks and protect their current trading position as far as possible.
It is also important to stay up to date with the latest information about Brexit. As well as signing up for the Government’s EU email updates, manufacturers should make contact with relevant trade associations to ensure they are receiving any guidance on offer. Taking this approach now, could open up opportunities in the future. For example, it may be possible for some businesses to collaborate to gain traction in the future, for instance by putting more volume through a single logistics provider.
Manufacturers can no longer afford to put off planning for the worst-case scenario and these technical notices should be viewed 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 be contingency planning now, so they are ready to act if the worst happens.