14 minute read 9 Feb 2018
truck harbour customs

How businesses are preparing for the uncertainties of Brexit

By

US Americas

Multidisciplinary professional services organization

14 minute read 9 Feb 2018
Related topics Tax Tax planning

Show resources

Businesses need to ask questions early and often about the impending departure of the United Kingdom from the European Union.

Businesses in the UK and EU — both local and global — face much uncertainty in the years ahead as the UK prepares to leave the EU. We spoke with two businesses to learn how they are preparing for the unknown.

When Alexandra Vale, Director of Value-Added Tax (VAT) Europe at Emerson, delivered a seminar to colleagues on the impact of Brexit, she was startled by the reaction. “There were 40 finance and tax specialists in the room, but only two had thought about how it would affect us,” Vale says.

The pending departure of the UK from the EU in 2019 is an event that the St. Louis, Missouri-based industrial company can’t afford to ignore. Emerson is a major UK investor, with facilities in Manchester, Leicestershire and Scotland, as well as across the EU.

We realize how much has to be done, and how far there is to go.
Alexandra Vale
Director of Value-Added Tax (VAT) Europe, Emerson

Many Emerson products are made to order, and few finished items are kept in stock at a single location. Purchasing is also performed on a procure-to-order basis to manage inventory. That kind of seamless production is leading practice — but it’s a system that works only when borders are open and trade flows freely across them. Brexit threatens that status quo.

For Emerson, it’s imperative to prepare for every eventuality and to identify ways of making certain that goods continue to move smoothly across borders after Brexit. Vale points to the threat of goods held for inspection at borders, delaying arrival. Potential bottlenecks are everywhere, from London’s Heathrow Airport to ports such as Dover in the UK, Hamburg in Germany and Dieppe in France.

“We need to know which border points are prepared, and also where serious queues could form,” Vale says. While there are currently about 100 million imports and exports a year involving the UK border, the number of customs declarations could rise by an additional 300 million post Brexit, according to the UK’s Freight Transport Association. Vale says it is widely suspected that the infrastructure and officers currently in place at border sites will not be sufficient to deal with a hard border.

“There is very little time for this to be fixed,” says Vale. “So it is essential to understand the routes our goods take today to determine where our issues could arise.”

Back to the basics

It’s a learning experience for everyone at Emerson, not just in the UK but across Europe. Because trade flows two ways, Brexit will have consequences on both sides of the UK-EU border. While many worry about new paperwork and procedures for goods crossing into the UK after 2019, Vale says her continental colleagues have thought less about Brexit than those in the UK.

For example, Vale says, German border authorities still have to recruit border guards, and training them may take at least two years. “We do not want goods being stopped at borders, but there is a high likelihood this will happen at the European ports as well as in the UK,” says Vale.

Vale says the business is tackling the most pressing issues by going back to the basics. “We are mapping our European trade flows to see where our goods come from and go to,” she says. This “stress testing” helps Emerson visualize both the trade routes and also to try and assess what levels of duty they would pay at the UK/EU border on various products.

tax corssing borders

Scenarios tested include an outcome where the two sides part company without reaching a trade deal similar to a free-trade agreement, which would mean that all businesses would be required to trade using World Trade Organization (WTO) duty rules and rates.

“While we need to be able to assess probable border duties, we also need to consider what the additional clearance and handling costs will be — anything between £15 and £65 per transaction — and the additional head count we would need to hire to process new border transactions,” Vale adds.

Emerson also keeps all of its partners up to date on developments. Vale says she believes this is vital. “We need to review all our contracts and trading terms with every supplier and customer,” Vale says.

“If we have a customer in the UK today that we would deliver products to from our French manufacturing facility, would the customer be happy to deal with duty payments and paperwork, orwould they expect us to do this? Our contracts need to be updated to reflect this and we need to have those conversations before Brexit hits, so there are no surprises for either our suppliers or customers, which could not only delay goods moving but also invoicing, etc.”

Long road ahead

One of the big unknowns is how the UK’s Her Majesty's Revenue and Customs (HMRC) will tax imports from the EU. HMRC currently charges import VAT on goods as they enter the country from non-EU states, Vale notes.

Key questions are whether firms will, in the future, have to self-assess their taxes as their goods cross into the UK or whether there will be a major cash flow impact as the VAT needs to be paid up front. If a self-assessment regime is brought in, will that mean additional reporting similar to Intrastat? How will duty be assessed under a self-assessment regime?

There are reasons to be hopeful. Compared to Italy, for example, Vale says the UK operates a highly simplified VAT reporting system, which will benefit companies of all sizes. And while Brexit will undoubtedly lead to border delays at first, she believes things will calm down after a year or two.

“It’s easy to forget that Europe had hard borders until the early 1990s, and a lot of business got done then,” Vale says.

From our point of view though, we don’t actually see a ‘border’ – we distribute according to need and where our factories are.
Michael Collins
Chief Finance Officer and Deputy Chief Executive Officer, LacPatrick

Businesses can apply to the European Commission for Authorized Economic Operator (AEO) status to pre-empt post-Brexit pain.

“While only a few of our divisions have it, it’s worth doing,” says Vale. “If you are AEO-approved, the chance of a shipment being digitally fast-tracked through customs is far higher, although the application process is lengthy.”

Perhaps the biggest threat facing corporates is a general lack of readiness, which is unsurprising considering the challenges preparing for an unknown eventuality. Emerson’s approach is to hope for the best but prepare for the worst, according to Vale. “People assume we will magically end up with lots of excellent trade deals,” she says. “We realize how much has to be done, and how far there is to go.”

Business without borders — for now

To understand the new trade-related border problems created by Brexit, it’s worth talking to LacPatrick, a 122-year-old Ireland-based dairy giant. A merger in 2015 gave it scale, with sizable operations on both sides of the island’s internal border.

LacPatrick collects 600 million liters of raw milk from 1,100 farmers and suppliers in Northern Ireland and the Republic of Ireland each year. That liquid base product is dried for export as baby formula, or made into cheese at a new £30 million plant in the Republic of Ireland.

LacPatrick’s milk products make “hundreds of border crossings a day, from north to south and south to north,” reckons LacPatrick’s Chief Finance Officer and Deputy Chief Executive Officer Michael Collins. “From our point of view though, we don’t actually see a ‘border’ — we distribute according to need and where our factories are.”

tax corssing borders

That’s about to change. The internal border was once a flash point in British-Irish relations, with goods and people heading in both directions often stopped and inspected. After peace talks in the 1990s, the border opened, the guards left and trade flowed without interruption.

Then came the UK’s vote to leave the EU, and the border issue has once again resurfaced. Only one physical border separates the EU from what will soon be its first former member state, and it’s here.

That raises two related questions: will Northern Ireland and the Republic of Ireland have a “hard” or “soft” border after the UK leaves the EU in 2019, and how the two-way flow of goods and services will be affected.

Border woes

Collins says the big fear is the return of a “hard” border. “It’s the logistics that concern me, queues of our trucks filled with perishable milk stuck at customs.”

In an effort to mitigate delays and other headaches at the border, LacPatrick plans to sign up to a “trusted trader” status on both sides of the border, having already registered in the UK with HMRC. This allows for shipments by AEOs to clear customs faster.

LacPatrick’s business model may also have to be re-evaluated as tariffs change after Brexit. The EU protects dairy farmers by imposing tariffs as high as 50% on milk imports. After March 2019, LacPatrick will be both inside the EU, and outside the EU exporting into it.

There is also the human element to consider. “We have farms that straddle the border, and a plant at Monaghan that employs people living on both sides,” says Collins. “But it is hard to see how there is no new infrastructure on the border once the UK is outside the customs union.

Facing the unknown

For now, Collins and the business are focused on staying busy and keeping abreast of any rule changes. “We engage with the UK Government and the EU, as well as EY and our suppliers and customers, to understand potential new legislation, and filing and declaration forms. We are up-skilling our administrative skills.”

Communication is vital, he adds. LacPatrick participates in as many forums as possible on both sides of the border with its suppliers, which number over a thousand. The business also maps and scrutinizes its supply chain on a daily basis.

So much of what the firm faces remains unknown for now. “We discuss likely outcomes on a day-to-day basis,” says Collins. “On one side of the spectrum, there is a trade deal amenable to everyone, resulting in ‘soft’ borders. On the other is a ‘hard’ Brexit, a ‘hard’ border and trading under WTO rules.”

One future may see its operations grow farther apart, not closer together. LacPatrick already acts as a separate legal entity on both sides of the border, and Brexit could result in it effectively becoming two entities focused on different export markets.

In this sense, Collins prefers to see Brexit as both a challenge and an opportunity. “We see huge possibilities opening up as the UK strikes free-trade agreements with non-EU states,” including the US and China, and nations in the Middle East, West Africa and Southeast Asia, he says.

“LacPatrick is well-positioned on both sides of the border, thanks to recent investments,” Collins says. “In our view, the best way to mitigate risk is to have the right assets in the right places.” 

Note: Details of the future trade relationship between the UK and EU were unclear at the beginning of 2018. All information in this article was current as of January 16, 2018.

Summary

We spoke with two businesses to learn how they planned to approach the uncertainties of Brexit.

About this article

By

US Americas

Multidisciplinary professional services organization

Related topics Tax Tax planning