Brexit and Supply Chain Actions
In the next of our practical guides to Preparing for Brexit we look at the implications on supply chains.
Where are you in the total supply chain?
It may sound obvious, but do you really know where you stand in the supply chain in relation to the goods you buy and sell? More specifically it would be beneficial to understand what increases in costs and potential delays you could face because of Brexit.
For example, you may think that you only buy and sell domestically, but if your suppliers are buying raw materials in from the EU and selling to you in the UK, they could be facing higher costs due to currency fluctuations and potential future import duties and import VAT. Costs that they could therefore be looking to pass on to you.
Whilst I certainly don’t want to get involved in any of the scaremongering that’s going on, it is not just the financial costs involved in the supply chain that need to be considered. Time delays are also a factor.
Whatever the outcome of the negotiations, it is almost certain that there will be extra checks and paperwork at the borders which in the short to medium term will cause delays. So, to go back to our example, even if you are buying materials from a UK supplier, they themselves may be facing supply issues.
The advice therefore is to discuss these factors with your suppliers and find out from them whether they have done an impact analysis and what plans they have in place to mitigate supply delays and raised costs.
Cashflow and VAT
This issue also relates to cashflow. Currently goods traded between the EU and the UK are not subject to VAT as we are part of the EU VAT area. So, goods going to the EU from the UK are currently despatches, and goods coming in are acquisitions. This will change when we leave the EU as we will be outside the EU’s VAT area and therefore VAT will be due before the goods cross the border. As a result, if you’re buying raw materials from EU suppliers you will have to start paying this VAT and this could impact your cashflow.
To get your business prepared, I suggest having a look at your previous 12 months acquisitions from the EU and seeing what sort of impact paying VAT on all those transactions would have on your cashflow. This will give you an idea of your potential situation following Brexit.
And don’t forget, if you’re exporting to the EU then your distributors or customers will have to start paying VAT on the products you sell them. So, consider the impact this will have and get communicating with them!
At the time of going to press, we had not heard whether the UK government is going to take the default position and proceed with the UK becoming a ‘Third Country’ for VAT purposes when we leave the EU. The alternative is whether it will ask for a special arrangement essentially remaining part of the EU VAT area, but not being able to have flexibility in setting VAT rates. If you want to be kept up to date on this, then subscribe to our newsletter at www.yourexportdepartment.com.
We will look at export specific issues in a later edition, but again from a supply chain perspective you need to understand where you fit in relation to your overseas customers. Is there any flexibility in the lead times you are giving, or are there late delivery penalty clauses imposed by your overseas customers? If there are, then try to renegotiate these for the months leading up to and following March 29th 2019, or if this can’t be done then think about how you avoid late delivery due to Brexit.
One thing is relatively certain in relation to Brexit and that is that your admin burden isn’t going to decrease. If, as the government has stated, the UK leaves the single market and the customs union then your admin burden will only increase. Goods that you buy from the EU will no longer be under free movement rules and will instead officially become imports. This in turn will lead to additional administrative work. Now is therefore a good time to review your capability and resources in this area. Check that you have enough staff to handle the increase in admin and whether your existing staff will need some training in import and export procedures. Similarly, goods that you sell to EU companies will officially become exports rather than despatches as far as HMRC are concerned. This could lead to a greater increase in administration as it is possible that ‘Rules of Origin’ issues come into play. It would be wise to check now whether you have anyone internally who understands ‘Rules of Origin’ or whether you need to consider other options such as training, recruiting new staff or outsourcing a consultant to help.
Foreign Exchange impacts imports and exports.
We all know that £Sterling dropped considerably immediately after the referendum and has fluctuated a lot since then. As many exporters are also importers any short-term currency gains in your export dealings may have been off-set by losses on your imports. Brexit represents an ideal opportunity to review and implement a currency strategy.
To give an example of the importance of this, looking at the Euro / £Sterling rate with a high of 1.3205 and a low of 1.09 represents a 30 percent volatility within the currency over the six-month period following the referendum. Or, in real terms when buying euros with £500,000 this translated to a difference of €115,000 between the six-month high and low. That is a big difference to any SME’s bottom line! Similar figures could be drawn up for the $US / £Sterling rate. Take a close look at how volatility in the exchange rates is impacting your cashflow and what FX-strategy can you put in place to mitigate this? Have you considered forwarding or hedging currency? If you need to make quick currency decisions, or changes to any currency accounts can you access your system on the go, or is it a laborious process? Again, look at this in relation to your position in the supply chain. If your company only deals in domestic sales, you are far more likely to be taking a hit on currency than those who are exporting. I would also suggest reviewing whether you have enough foreign currency business to warrant opening bank accounts in Euros and Dollars. This can give you greater flexibility in only moving money back to your £Sterling account when the rate is favourable to do so.
Understand your position in the supply chain and discuss Brexit impact with your suppliers.
Review previous 12 months acquisitions from EU and calculate how much import VAT would have been due to get those goods into the UK and evaluate the impact on your cashflow.
Have open dialogue with your EU distributor partners about the impact of Brexit.
Check for late delivery penalty clauses in contracts.
Evaluate your admin resources and consider training or taking on new staff.
Create and implement a foreign exchange strategy.
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