Sally Jones, EY Brexit Trade and Strategy Leader
David Borland, EY UK Automotive Leader
31 December 2020 marks the end of the Brexit transition period, when the UK will leave the EU’s Single Market and Customs Union. The UK will begin a new economic relationship with the EU – either with a trade deal (Free Trade Agreement or FTA) or reverting to World Trade Organization terms.
The COVID-19 pandemic, together with the removal or redrafting of unilateral easements previously announced by the UK and the EU in the run up to previous Brexit deadlines, means that past Brexit preparations for the sector have been disrupted or, in some cases, entirely undone.
Change is now inevitable. At the time of writing, the FTA negotiations remain deadlocked. With political noise increasing, businesses cannot afford to wait the outcome of the UK/EU talks. The focus should turn to practical, commercial, no-regret actions that reduce the potential negative impacts of change – recognising that the lead time for implementing many mitigating strategies has passed.
With less than 100 days to go, now is the time to take a draw breath, take stock, and work out what needs to be done.
Break Brexit down into bite sized chunks
We have identified ten key areas that businesses should be focusing as we approach Brexit.
- Trade in goods and customs
- Supply chain
- Commercial and pricing
- Trade in services
- Legal and contract
- Tax and finance
- Regulatory and compliance
- IT, systems and data
- Talent, people and workforce
- Northern Ireland
Though not all of them apply to every automotive business, the industry in general will be impacted due to the level of cross border movement of finished vehicles and parts that generates over £100bn in trade. Almost 90% of passenger cars sold in the UK are imported with 70% from the EU, and 80% of cars produced are exported, with greater than 50% heading to the EU.
Given the not insignificant volumes of trade between the UK and EU, we are urging those in the retail automotive sector to review their business systems and operations now so that on Brexit day-one they are ready to hit the ground running.
For the sector specifically, there five areas that dealers should focus on above all else:
Trade in goods and customs
Arguably the single biggest Brexit risk is failure to prepare for the new border formalities. The UK intends to phase its new processes in over six months but the EU intends to treat the UK as a third country from 1 January.
We encourage you to:
Directly engage with your suppliers to define customs and borders roles and responsibilities so all parties have a clear understanding of the practicalities and the handovers in the chain to avoid unexpected costs and delays.
Ensure customs brokers or internal declaration capability and capacity are in place where you are required to be the importer and/or exporter.
Do at least a rough calculation of your additional duty costs based, on the UK Global Tariff (for UK imports) and the EU Common External Tariff (for EU imports).
There are expected to be significant disruptions to the UK’s port operations, with Eurotunnel and Dover expected to be most impacted over several weeks. Realistically, you should expect delays and disruption, particularly for the delivery of spare parts.
Regarding supply chain, you should:
Identify inbound/outbound shipments due around Brexit cut-off dates and consider bringing orders forward.
Increase your stock, particularly of parts most prone to fail or to need emergency replacement.
Prioritise key customers and services, recognising that you may not be able to service all of your customer base as you might wish.
Commercial and pricing
Your cost base is likely to increase, through additional tariff costs and compliance requirements but also because of pressure on working capital. Taking these factors into consideration, you should:
Determine how much of the additional cost will be absorbed by your business, and how much will be pushed to customers (or pushed back to suppliers).
Decide upfront whether and to what extent you might be willing to give preferential payment terms to suppliers and customers in financial distress.
Assess whether you’re exposed to foreign exchange movement and, if so, whether to take out a hedge with your bank.
Legal and regulatory
The exact nature of the legal and contractual challenges facing businesses will depend on the regulatory landscape and the provisions of the contracts and legal relationships you have with suppliers, customers and service providers. There is also the potential for legal divergence from current EU regimes.
To help mitigate risks, you should:
Identify any day one changes to your compliance obligations under product safety and similar legislation. This will apply for EU trade into UK and for UK trade into the EU.
Review your standard T&Cs and supplier contracts to identify any clauses which need updating.
Talent, People and workforce
From January 2021, the UK will have a new points-based immigration system. EU and EEA citizens resident in the UK before 31 December 2020 will have the right to settle provided that they apply to the EU Settlement Scheme before 30 June 2021. With people often being a businesses greatest asset, being aware of any potential pitfalls is essential:
Make sure any EU or EEA citizens working for you know about the EU Settlement Scheme, and how to apply if they wish.
Familiarise yourself with the new ‘right to work’ checks that will apply if you take on EU or EEA citizens from 1 January.