Brexit – this time it might be for real
As Brexit endgame finally appears to be approaching, what can companies still do to prepare for the inevitable disruptions to trade?
“There can be a temptation for companies to think that they should wait and see what happens, but thankfully we have seen companies doing something about it and taking Brexit actions despite all the uncertainty.” Photograph: iStock
The tragicomedy that is Brexit is at last approaching its closing act. The 42 months since the 2016 referendum have sometimes felt like 42 years, as deadline after deadline passed and final extension after final extension was sought and granted. Perhaps the only political cliché not wheeled out during that period has been “we are where we are” – probably because no one can really say just where that is with any degree of certainty.
But it finally looks as if some degree of clarity might be beginning to dawn. A withdrawal agreement is on the table and the UK goes to the polls tomorrow, December 12th. While there is no degree of certainty that the election will return a parliament willing to vote in favour of prime minister Boris Johnson’s withdrawal agreement, it is highly unlikely the result will be a house which cannot agree to anything. In all likelihood, what is being faced is the prospect of the withdrawal agreement being voted through by a Tory majority or a hung parliament, allowing a no-deal, crash-out Brexit to happen by default on January 31st, 2020.
That means Brexit, one way or the other. The question for Irish companies is if they have prepared sufficiently and, if not, what can they do now to mitigate the worst effects?
When we do surveys of clients, the percentage who have taken Brexit actions is always in the high 80s
“We are now in the third extension,” says Enterprise Ireland Brexit Unit manager Jonathan McMillan. “We’ve been through it a few times before. There can be a temptation for companies to think that they should wait and see what happens, but thankfully we have seen companies doing something about it and taking Brexit actions despite all the uncertainty.”
This is in the nature of Enterprise Ireland client companies, he believes. “We have the privilege of working with companies who are primarily focused on international trade. They are exporters for the most part and this means they are importing a lot as well. When we do surveys of clients, the percentage who have taken Brexit actions is always in the high 80s. It always comes down to about a third of Irish companies and SMEs overall who say they haven’t done very much. You do wonder with all the publicity and media coverage given to the subject, is there anything anyone can do to get them to do anything now?”
‘Element of calmness’
PwC global trade and customs partner John O’Loughlin believes the majority of companies have put plans in place. “We are seeing an element of calmness at the moment. This is in sharp contrast to September and October. The risk of no-deal was quite high back then and there was a lot of anxiety and nervousness in the market. At least there is a deal that can be ratified now.”
Brexit-exposed areas like beef or construction with low margins may have high tariffs to contend with
But what about those companies which haven’t prepared? McMillan advises them to look at what he calls the obvious areas. “Customs and logistics: how do I get product in and how do I use the landbridge? Financial planning is also important. There are currency, customs, compliance costs to take on board. Brexit-exposed areas like beef or construction with low margins may have high tariffs to contend with. And then there are supply chain issues around getting products in and through the UK. Will suppliers be able to get goods in? Will product authorisations and certifications still be valid?”
Other areas to look at include regulatory changes around the movement of people and data flows. “We constantly get asked about products, but data is really important and there are some very practical things companies can do to prepare for that.” (see below on Brexit and GDPR)
KPMG VAT partner Glenn Reynolds also offers some practical advice. “There are many Brexit issues to consider,” he says. “These range from ensuring hauliers and freight forwarders have the relevant permits to having an EORI [Economic Operators Registration and Identification] number if you are importing or exporting goods from Ireland to checking that your supplier and customer contracts meet your needs post-Brexit, and, in particular, who is responsible for import clearance and any duties arising.”
‘Potential tariff implications’
The rate of duty arising on goods depends on their customs classification. “Make sure you have confirmed the commodity codes for all goods moving into and out of the UK and vice versa and you understand the potential tariff implications associated with the movement of your goods,” Reynolds adds.
Our view is to encourage companies to plan. The eventual outcome of Brexit remains uncertain, but it will happen
“Consider how you will file Customs declarations for your export or import of goods. Most declarations are filed by customs agents or freight companies on behalf of traders. Depending on your profile, you may prefer to bring the declaration process in-house. Make sure you understand the information needed to file Customs declarations and where you will get it.”
He also points out that there may be additional VAT considerations arising from your movement of goods post-Brexit. “New VAT measures to be introduced in the event of a no-deal Brexit should relieve the VAT funding cost of imports for VAT-registered businesses in Ireland and the UK. Familiarise yourself with how these rules will operate.”
“The main thing for companies that haven’t prepared because of the size of the challenge is that they shouldn’t be overwhelmed,” says Jennifer Hawkins, senior manager with PwC Global Trade & Customs. “If companies take time to look, there is an increasing amount of supports through Government agencies and Enterprise Ireland to help them prepare.
‘A few small actions’
“Even a few small actions could put you in a much better place at this late stage,” she continues. “Look at what you need to do to get goods to the customer. Get a customs broker to make the declarations for you. Make sure you have a method in place to pay the duties. Make sure you have some way to connect with the Customs authorities. There is a real shortage of brokers and we are seeing some businesses using IT solutions to look after that for them.”
For some of our clients and companies trading in Ireland, there is only one type of Brexit and it’s hard
O’Loughlin stresses that any actions taken now will almost certainly not be in vain. “Our view is to encourage companies to plan,” he says. “The eventual outcome of Brexit remains uncertain, but it will happen, save for a second referendum. At the moment, we don’t know if the deal will be ratified. If it is ratified, we will have status quo until the end of 2020, with a potential extension of up to two years. Anything done now is not wasted for the future. The UK will be a third country at the end of the transition period or in the event of a no-deal.
“No free trade agreement in the world has achieved what the EU Single Market has achieved,” he adds. “Regardless of what kind of future relationship deal is agreed, there will still be a need for EORI registrations and customs. And for some multinationals, origin might be an issue when the UK falls out of existing EU free-trade agreements. For some of our clients and companies trading in Ireland, there is only one type of Brexit and it’s hard. If goods come in from China and go through the UK there is the risk of having to pay customs on them twice.”
McMillan advises companies to look beyond Brexit as well. “Overlaying all of this should be what companies need to do strategically to strengthen themselves for life in the post-Brexit world. They will have to become more innovative, more competitive, and more diversified.”
And Hawkins has some other advice for the post-withdrawal agreement period. “When it comes to negotiations on the future relationship, businesses will have to speak up more. Free-trade agreement negotiations can typically take up to seven years and Ireland wants to have the best possible market access between the UK and the EU. It’s not an easy road ahead and we are transitioning to a fundamentally different relationship.”
Brexit and GDPR
The UK’s slow-motion departure from the EU and the General Data Protection Regulation (GDPR) are relevant to one another, not just by virtue of being among the most reviled conversation topics over the past three years. They are linked because GDPR also governs the transfer of personal data outside the EU.
For Irish companies transferring data to the UK after Brexit, it will be the same as if they were transferring it to Australia or Brazil. They will have to put in place additional safeguards in accordance with GDPR requirements.
The first thing for firms to do is to establish exactly where their data goes. They should already have done this following the enactment of GDPR, but it is worthwhile taking another look.
Companies may not realise that their cloud storage provider is located in Britain or Northern Ireland. Their pension schemes, payroll, and staff healthcare plans may all be run out of the UK and involve the regular transfer of personal data. Workplace benefits databases could also be held in Britain or Northern Ireland. Even translation services might be covered if personal data is included in the material to be translated.
Having established if data is being transferred to the UK, the next step is to decide if that arrangement needs to continue. There may be options to look for another service provider in Ireland or another EU member state and these should be explored.
If it is not practicable, there is a ready solution to hand. A simple-to-use tool to solve this problem is available on the Data Protection Commission (dataprotection.ie) website. It is known as the standard contractual clauses (SCCs). This is a set of off-the-shelf clauses developed by the European Commission and which are recognised as an appropriate safeguard to ensure that firms remain compliant with GDPR.
These pre-prepared clauses can be appended to existing contracts and come into force when both parties sign them and complete the relevant details. This enables firms to continue transferring data to the UK in full compliance with GDPR. Data subjects are also given certain specific rights under the SCCs, even though they are not party to the relevant contract.
Firms are also advised to update their privacy statements to indicate that the data is transferring to the UK under the terms of the SCCs.
The top 10 Brexit essentials
These tips from Enterprise Ireland highlight the key questions businesses need to address ahead of the UK’s departure from the EU.
The Economic Operators Registration and Identification (EORI) number allows businesses to import or export with countries outside the European Union. The EORI number is a unique reference number recognised by all EU member states and is a requirement on all customs declarations. To obtain an EORI number, companies can register directly through Revenue. If you are already registered on Revenue Online Service (ROS), you can register within a matter of minutes. Once the registration is complete, the EORI number is active immediately.
A commodity code is an eight-digit code (for exports) and a 10-digit code (for imports). It is part of a harmonised system developed by the World Customs Organisation to classify goods into one of about 5,000 different commodity groups. The system used to identify the commodity code is the EU TARIC. The code is used to identify duty rates as well as other customs obligations such as licensing requirements or quotas.
Country of origin
One of the main factors in determining the duty payable on imports is where the goods have originated. Goods from certain countries may qualify for preferential treatment such as a reduced or zero-duty rate. There are two main categories of origin: wholly obtained such as fruits grown, processed and packed in Ireland, and sufficient processed with materials from more than one country. The country of origin for manufactured goods can be quite a complex determination as it is decided on the basis of the country in which the last “substantial processing” took place.
The movement of goods to and from the UK after Brexit may require the payment of a tariff. Goods imported from the UK will incur World Trade Organisation (WTO) tariffs. These are usually quite low but can be significant in the agri-food sector. The British government has published a temporary tariff schedule under which 87 per cent of total imports to the UK will be tariff-free. This will apply for up to 12 months while a more permanent arrangement is decided upon.
What is your currency exchange rate?
Currency volatility has always been a characteristic of Irish trade with the UK and Brexit has only exacerbated it. Understanding and managing currency movements has now become critical as businesses seek to prevent margin erosion. One of the key steps to managing this risk is the identification of a break-even exchange rate for UK sales. This will allow all companies to model and stress-test various currency scenarios.
Managing exchange rate risk
Simple steps to manage currency risk include opening a sterling bank account, invoicing in euro where possible, and matching sterling supplier costs with sterling revenues. More complex measures such as foreign exchange options and forward contracts may be worth exploring with a financial adviser.
When looking at the impact of Brexit on cash flow, factors like customs charges, tariffs, forward purchasing, warehousing costs and expenditure on exploring new markets come into consideration. The first step is to develop a robust forecasting model to understand how much additional funding, if any, will be required to support post-Brexit business operations.
Supply chain implications
Brexit has the potential to have a significant adverse impact on supply chains. The UK accounts for about 26 per cent of total Irish goods imports. The imports are frequently used as intermediary goods which are processed further in Ireland for re-export. The greater the percentage of goods sourced from or though the UK, the greater the potential impact on a business due to customs tariffs, border delays and so on. To mitigate the risk, the first step is to understand the overall exposure by analysing all suppliers from a Brexit perspective and identifying those with the greatest potential impact on the business.
UK supplier impact
Not all suppliers are created equal. A company may have large numbers of UK suppliers and some may be difficult to replace due to long-standing relationships, favourable credit terms or a unique product offering. The key step is to identify the suppliers which cannot easily be replaced and establish their potential impact on the business in terms of increased costs, customs delays or regulatory divergence.
Security of supply
It is critically important to engage with key suppliers to develop long-term agreements. Options around increased ordering, enlarged storage capacity and supply commitments can be explored as part of this. If the supplier does not engage and the risk remains unacceptably high, alternative supply options can be considered.