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With only 16 months left before Brexit, UK companies face a daunting to-do list to prepare for customs, scrutinise supply chains, redraw contracts, develop contingency plans and much more.
The sheer range of tasks businesses need to undertake ahead of the UK’s scheduled departure date of March 29 2019 — and the accompanying logistical difficulties — are one of the principal reasons Theresa May’s government is seeking to negotiate a two-year transition agreement with the EU.
Otherwise, companies may have to boost warehouse capacity, ensure they have sufficient cash flow to meet new VAT demands and prepare for the advent of customs with the EU. The changes may even prompt some to consider relocation.
Mats Persson, head of policy and trade at the consultancy EY, says: “There is a big point of no return coming up between now and the end of the first quarter of 2018, where banks and pharma companies need a strong signal to stop relocating activity”. Manufacturers and retailers have some more time but cannot stall for long.
Even companies that have no direct operations that cross the border between the EU and UK might find their supply chain disrupted or discover that intellectual property protection is no longer valid.
Here is a list of nine areas that companies need to focus on in preparation for Brexit — and whether a transition deal will help.
1. Build corporate customs infrastructure
British companies will need to fill in customs declarations for all goods crossing the EU border if the UK leaves the single market. This requires updates to business operations software, which can have long lead times. The EU requires eight copies of each customs declaration; future UK requirements are not yet known.
Any company wanting to trade across borders will also need to ensure internal systems communicate with both the EU’s customs technology and a new UK system. HM Revenue & Customs estimates the number of customs declarations will rise from 55m to 255m annually. Mr Persson says: “It will be a huge challenge for it to be ready by 2019.”
A transition deal can win time to prepare as long as customs declarations are not needed for trade with the EU27 over the transition period.
2. Obtain Authorised Economic Operator status
Only 606 British companies are officially registered as a “trusted traders” of goods across external EU borders. The status allows faster clearance at borders if a company’s procedures are deemed as compliant by authorities in both countries. More than 6,000 German companies have qualified and France has more than 1,550.
The Institute of Export and International Trade cautions “achieving Authorised Economic Operator status is a time-consuming and often daunting exercise”. The process, which involves filling out a complex form, can easily take a year — so companies that want to be ready for March 2019 are already close to the deadline. Joe Owen of the Institute for Government think-tank said an estimated 130,000 traders would be dealing with customs for the first time after Brexit.
A transition deal will give UK companies more time to catch up.
3. Decide whether to make use of an EU free-trade agreement
Using a bilateral trade agreement can save costs on tariffs but will increase bureaucracy because businesses must prove each good is sufficiently British to qualify for zero rates. With the trade-weighted EU average tariff of only 2.3 per cent for non-agricultural goods, some exporters will decide to pay rather than face compliance costs, so companies will need to take a strategic decision after auditing their processes.
A transition helps, but may be of limited benefit for companies exporting to economies with agreements with the EU, such as South Korea.
4. Map and audit supply chains
Even if a company is ready for Brexit, it will be disrupted if a supplier is not prepared and cannot meet its contracts. Assessing such risks will be an intense information-gathering exercise. Dale Williams, head of corporate operations at KPMG, says that while the automotive industry is highly knowledgeable about its links with suppliers, other sectors, such as oil and gas, “don’t get supply chains”.
About 63 per cent of EU companies are already seeking to ditch UK suppliers and 40 per cent of UK companies are seeking domestic suppliers, according to the Chartered Institute of Procurement and Supply.
A transition deal will provide more time for supply chains within the EU, but there are potential problems for UK companies’ trade with third countries.
5. Audit all international contracts, renegotiate some
Some intra-EU contracts will not include incoterms, the legal provisions for importing and exporting that define who is responsible for shipping goods across borders. This is especially important for VAT. Many businesses may find that their current contracts lack the details to deal with a new customs border between the UK and the EU.
A large purchaser, such as a supermarket, will have thousands of such contracts. Even if each takes only an hour to check, to go over 1,000 contracts would occupy more than half a year of an employee’s time. A renegotiation would take longer.
Despite the relief provided by a transition, audits may still need to be performed for non-EU trade affected by the UK’s departure.
6. Ensure adequate cash flow for VAT and additional inventory
Brexit poses a cash flow problem for trading companies because VAT will be charged at the border when importing goods and services. Intra-EU trade is currently exempt from VAT payments. Cash flow problems will be compounded for companies that need to hold additional inventory as insurance against potential delays at borders.
So long as Britain remains within the EU’s VAT system, which is part of the single market, a transition will give companies extra time to prepare for Brexit.
7. Develop a contingency plan
There is no guarantee that border procedures will operate smoothly immediately after Brexit, and companies will need a contingency plan in case systems fail. When Australia introduced a new customs procedure in 2005, it seized up within two days, leaving the nation short of medical supplies and toys for Christmas.
With the port of Dover a potential bottleneck, companies will need to consider alternative shipping arrangements and some will want to invest in greater warehousing, which is already reaching capacity. Prices of warehouse space are “going through the roof”, according to Walter Boettcher, director of research and forecasting at Colliers International, a commercial real estate group.
A transition will allow more time to prepare alternative suppliers and contingency procedures in case of border problems.
8. Know your employees’ nationalities
The EU withdrawal bill will transpose most EU employment regulations into UK law and the Brexit divorce negotiations seek to guarantee the rights of EU nationals already in the UK. But companies will need to understand the rights and status of all of their EU workers to ensure they are employing them legally after the UK leaves the bloc. Ward Ham, a law firm that operates across the north of England, recommends its clients monitor their workforce “in terms of where they work, their immigration status and regularly review their employment contracts”.
This work needs to be done regardless of the transition.
9. Intellectual property
Intellectual property protection, including patents, trademarks, registered designs and copyright could all change after Brexit. The British government’s Brexit IP website seeks to reassure companies that such protections will still apply in the EU after Brexit, but it says it cannot give the same assurances for the UK.
The British government says European patents will still apply in the UK but, according to the website, the UK is “exploring options” in other IP areas, such as trademarks and designs, because in many cases these will lapse after Brexit.
Companies will have to act quickly to ensure they can still protect their existing rights in the UK after it leaves the EU, but the process is made much more difficult because the British government has yet to develop an alternative plan.
A transition will continue to offer existing intellectual property protections, giving the UK time to put in place an alternative after Brexit.
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