Friday, October 12, 2018

Advice for SMEs on Brexit and What They Can Do to Prepare for It

Logistics Consultant Takes a Hard Look at Leaving the EU
Shipping News Feature
UK – As part of our series of articles on Brexit we have been looking at the opinions of those involved in negotiations with government in an effort to ensure that solutions to a raft of problems pass initially through the hands of those best equipped to understand them. This week we are grateful to Andrew Thorne from specialist global logistic consultants KTF Stone for his personal analysis of the current situation as it faces small and medium sized enterprises. He writes:

On 20th September the European Union Committee of the House of Lords published its latest report on the implications of a ‘no deal’ Brexit and its first findings on the government’s Chequers White Paper, published in July. This covered its proposal to the EU for the establishment of a Facilitated Customs Arrangement (FCA), which seeks to maintain most of the current trade arrangements with the 27 remaining EU members while allowing the UK to have its own independent trade policy.

The report was based on written and oral evidence from various experts with knowledge of trade and business, as well as government ministers, and included representatives from the Freight Transport Association, The Federation of Small Businesses, The Institute of Directors, and HMRC, among others.

The main chapters of the document set the scene for how the customs union and single market works (Chapter 2); the likely impacts of a ‘no deal’ Brexit, along with mitigation options (Chapters 3 & 4); and an overview of the mechanics of the proposed FCA (Chapter 5), followed by a summary of conclusions and recommendations.

Some of the key points from that summary:

  • ‘HMRC have estimated that, overall, the cost to UK businesses under ‘no deal’ would be £18 billion per year.’ 1. Even in the event of an agreement broadly in line with the government’s FCA proposal, the costs are estimated at around £700 million.
  • The difference between a ‘no deal’ Brexit and a form of FCA is significant and material, but even an FCA in its current proposed format does not address many of the issues around the single market such as ensuring common standards rather than aligning tariffs and managing revenue collection. Some form of border control for Sanitary and Phytosanitary (SPS) measures is unavoidable, as are checks to prevent abuse of tariff / quota differences if the UK later makes its own trade deals. Given that ‘from June 2017 to June 2018, UK goods exports to the EU accounted for 49% of the total value of goods exports, while imports from the EU were worth 54.9% of the total value of all UK goods imports’ 2, businesses can expect an increase in time, cost and complexity across the board.
  • Much is made elsewhere of technology as an enabler and facilitator of trade and a solution to the border problems posed by Brexit. It is true that there is a lot of potential for this in the longer term, however the experts giving evidence agreed that there is no realistic option available for March next year, and very little hope for several years after that. My personal feeling, given the track record of government and its outsourcing partners in handling major IT projects, is that the technology is less of a worry than the implementation.

My interest in the report was focused on the implications for small and medium businesses currently trading internationally, looking to break into new markets, or sourcing from the EU. It is these companies that are likely to feel the heaviest impact, due to limited resource availability, missing knowledge and a lack of funds to invest, especially when considered in a context of rising costs in all areas and a potentially shrinking UK market if the economy contracts.

The report points out that ‘an estimated 145,000 VAT-registered UK businesses trade only with the EU and there may be up to a further 100,000 businesses under the VAT threshold in the same position’ 3. In a ‘no deal’ scenario, they would have to acquire customs and regulatory skills for the first time, or outsource them to specialists, at a cost. It is not a given that the freight forwarding & customs broking service providers could manage the increase in demand and would need to recruit and train a significant number of new staff members in short order.

Another area of risk for SMEs derives from the fact that the government is setting a lot of store by trusted trader arrangements such as the Authorised Economic Operator (AEO) scheme. For the FCA proposal to work, it requires the implementation of a ‘dual tariff’ arrangement, whereby if goods enter the UK en route for the EU, the duty and taxes are payable at the EU rate. If they are for the UK market, potentially different rates would be applied. Without going in to too much detail, this would put the onus on businesses to track goods under their responsibility, to manage and account for the taxes payable, and to provide evidence if required of each step of the process. Add on the fact that some goods may be used as components in finished articles and/or transformed from one thing to another, and you can see why this would be disastrous for a small business to have to deal with in real time.

The proposed solution would be to expand the number of trusted traders in an AEO scheme, exactly what is being advised currently across the industry, but in its current form the scheme is very demanding both in the requirements to obtain certification and financially, with the need ‘for bank covenants or bonds to the value of twice the estimated monthly declarations’ 4. The report states that at the time of publication only 638 UK companies are registered in the AEO scheme. These are nearly all major multinational or international corporations, of sufficient size that between them they cover between 60-75% of goods exported from and imported to the UK.

The scale of these companies means that they have the resources and experience to apply for, qualify for and maintain AEO status, but it can also be inferred that there are thousands of SMEs making up the balance of imports and exports, each with a much lower volume of trade and an exponential overhead per transaction if they have to get approved status, taking up to 8 months and requiring a significant investment.

Lastly, and most pertinently, running through the whole document is the recognition that there is not enough certainty for concrete planning to be completed. Indeed, the EU negotiators have already ruled out the FCA in its current form, as it delegates too much responsibility for security, standards and revenue protection to a non-member state. As one of the conclusions states:

“We are concerned that, only six months before the UK’s exit from the EU, agreement has not yet been reached on the principles underpinning any future customs arrangements” 5.

So what should SMEs do in the meantime? It does not make sense to back one horse or the other too heavily, but there are some ‘no regret’ investments that can be made to give you the best chance of reacting effectively when the final position is clearer:

  • Make sure you have an up-to-date supply chain analysis, and if you don’t, get one done. Work out where the impacts are most likely to be and look for alternatives if feasible
  • If you don’t have one already, identify a reliable freight forwarder or customs broker who can help you if needed in the future. It’s worth checking experience and capacity, and remember that cheaper isn’t always better - a good place to start is the BIFA website.
  • Check with your trade association(s) that they are monitoring specific implications for your industry, and make sure you are kept up to date on developments generally through your local chamber of commerce.
Citations are from the House of Lords European Union Committee 20th Report of Session 2017-19 Brexit: the customs challenge published 20th September 2018.

http://www.parliament.uk/business/committees/committees-a-z/lords-select/eu-external-affairs-subcommittee/news-parliament-2017/brexit-customs-report-publication/

  1. Summary of Conclusions and Recommendations, Paragraph 6
  2. Chapter 1: Introduction, Paragraph 1
  3. Summary of Conclusions and Recommendations, Paragraph 4
  4. Chapter 5: The UK Government’s proposed customs arrangement, Paragraph 156
  5. Summary of Conclusions and Recommendations, Paragraph 32
*E.g. https://bifa.org/news/articles/2018/oct/uk-freight-forwarders-association-expresses-surprise-at-the-recent-news-on-the-uk-governments-plans-for-customs?l=y