Just a month since Britain voted to leave the EU and an article in Telegraph (Retailer Next faces Brexit currency woes) shows some of the immediate customs issues coming out of the Brexit vote, namely:
- Planning for changes in the supply chain in the event that selling stock from the UK becomes less efficient;
- Exchange rate impact making imports more expensive and driving up customs duty costs.
Set out below is a more detailed analysis of the two issues.
Changes to the Supply Chain
Next is looking at setting up a European warehouse to sell to EU customers ‘in the unlikely’ event that selling from the UK to Europe becomes less efficient. It is still unclear what trading arrangements with the EU will look like, with a number of models and the potential for a bespoke arrangement being touted (see Brexit: Customs Impact).
We know the UK is pushing ahead and seeking free trade agreements with a number of countries with whom the EU has no agreement. Such agreements would be incompatible with the UK’s current trading arrangements with the EU. It would lead to differences in the external tariff barrier which in turn leads to risks of diversion of imports through the UK at lower duty rates before onward movement in to the EU.
We also know that the EU sees free movement of people as fundamental condition for the UK maintaining current trading arrangements whereas the UK government sees control of immigration as a red line issue.
It therefore seems likely that the UK and EU will agree a free trade agreement for originating goods only. The origin rules in free trade agreements are complex, depending on the classification of the goods to set the rules. Typical rules include:
- Value added rule whereby a given % of the ex-works price must ‘originate’ in the beneficiary country (typically 40-50%);
- Tariff shift rule whereby the material inputs have a different customs classification from the finished outputs;
- Stage of process rule whereby certain stages on manufacture must be carried out in the beneficiary country;
- A mixture of the above.
Trade agreements also include anti-avoidance provisions which prevent simplified operations being sufficient to confer origin even if the above rules are met.
The Telegraph reports that Next believes it unlikely that the new agreement between the UK and EU will make selling to the EU market less efficient because its garments are already imported from Asia. Clothing attracts a standard 12% but there are reductions for imports from certain less developed countries such as Bangladesh under GSP. These garments would not benefit from a UK/ EU agreement if it were based on origin and so would be hit by a double duty hit of up to 24% (on initial import to the UK and then from the UK to the EU).
There would be ways to mitigate any double duty hit, including:
- Option One: Setting up an EU warehouse and direct shipping goods there for sale to the EU market (as mentioned in the article)
- Option Two: Setting up a bonded warehouse in the UK so that goods brought in and then exported to the EU would only be subject to duty in the EU
- Option Three: Setting up an Inward Processing program to achieve the same result as warehousing. Inward Processing set up and operating costs are lower but there are stringent time-limits between import and export
Next will be keen to ensure its goods continued to benefit from preferential rates under GSP. GSP benefits are only available if goods are shipped directly to the EU or, if shipped via another country, the goods remain under customs supervision while in the intermediary country. The direct transport rule is met in option one, where the goods are sent straight from origin to the EU warehouse. The condition could also be met in options two and three but at the cost of Next obtaining new origin certificates and maintaining clear audit trails.
Options two and three would also incur additional customs clearance costs as good would be imported, exported and imported again.
Weak Exchange Rate Increases Duty Costs Immediately
The weakening of sterling against other currencies used in international trade will increase the cost of those goods. As customs duties are predominantly based on the value of goods (ad valorem) these costs will also rise.
Many businesses such as Next will carry out treasury functions to hedge its currency risks and this explains why the weakening of sterling will not impact them until 2017.
However, for customs duty and import VAT purposes any foreign currencies are converted to sterling at a customs rate of exchange, which is set monthly unless the spot rate varies by more than a specific tolerance. As such, the weakening of sterling is likely to give rise to an immediate increase in customs costs even if currency is hedged by the importer.
Recommended Next Actions
We recommend clients review their operations to assess the likely customs impact of Brexit. This would include assessing:
- The value of acquisitions from the EU as these could be subject to duty, increased deferment guarantees and import VAT (the latter causing cash-flow issues). Clients will need to determine commodity codes for goods coming from the EU in order to determine these costs.
- The number of imports from and exports to the EU as these will be subject to customs declarations and charges from customs brokers (typically £35 per entry).
- What evidence held to support the origin of goods as this will be a key factor in taking advantage of any trade agreement put in place.
- The customs impact of goods imported into the UK from the Rest of the World (ROW) and sold in the EU as there is a potential double duty charge that needs mitigating.
- The customs impact of goods send from the ROW in to the EU and then on to the UK as there is a potential double duty charge that needs mitigating.
Once you have a clear view on the potential impact you can determine what pragmatic steps to take to mitigate any additional costs or supply chain risks. The customs regulations provide regimes such as customs warehousing, Inward Processing etc to ensure your goods are not subject to double tariff hits. Customs transactions costs may be mitigated through use of Customs Freight Simplified Procedures (CFSP). These regimes are likely to give greater returns on investment post Brexit.
It is important to note that the new customs rules implemented on 1 May demand greater supporting information and documentation be provided to support applications for special procedures. HMRC has 120 days to process any applications from submission of full information. The changes are likely to give rise to a significant number of applications which will stretch resources further to delays could impact your supply chains and increase your costs. As such, early action is required.