Global traders know all about the Rules of Origin, they’ve been playing by them for years. EU traders don’t. They haven’t needed to for a generation. But that could be about to change. Here’s what you need to know about Rules of Origin.

The Institute for Government defines the Rules of Origin as “how customs authorities classify where an export has come from in international trade.”  In the event of a No Deal Brexit, anyone that exports goods into the EU from the UK will have to prove their provenance. You will need to allocate extra time and funds for this too little discussed Brexit detail. This Government document outlines what needs to be done to comply with Rules of Origin.

This is one of the many details that could inadvertantly trip up businesses that haven’t covered all the bases when it comes to getting ready for Brexit. These minutae are what the Ready for Brexit checklists are designed for. Download them now to get a comprehensive checklist of everything you need to do to give your business a fighting chance of not only surviving Brexit but thriving from it. You should find our No Deal Brexit action plan invaluable too, it’s the absolute basic list of actions which you must take leading up to Brexit and the immediate aftermath. And the last download you need in your Brexit toolkit is our Brexit audit tool, which will help you to ensure that everyone in your supply chain is prepared for Brexit too.

Do as the Scouts do, be prepared.

Anna

DFS Brexit prep continues as the furniture manufacturer and retailer announces a rise in profits, but warns of a challenging trading environment ahead. Anna Tobin reports

DFS reported its preliminary results today and revealed that its underlying profit before tax, excluding brand amortisation, for the pro-forma 52 weeks to 30 June 2019, are up 31.1% on the 52-week period to 28 July 2018.

The financial report stated, however, that: “The trading environment continues to be challenging, with weak consumer confidence and falls in the number of housing transactions impacting order intake. The outlook for consumer confidence, compounded by the ongoing uncertainty regarding Brexit, has been much talked about in the news media. The Senior Leadership Team has developed comprehensive plans to address any short-term dislocation arising from a no-deal Brexit. It is notable that under WTO rules imported furniture is tariff free, which is helpful, but in the medium term the implications of a sustained drop in the value of Sterling and the consequent inflationary effect for imported products is likely to become a key factor affecting consumer confidence for high value household items. The mitigation of this will be a key focus for our team in the coming year.”

DFS Brexit prep

DFS Brexit prep is concentrating on six key areas where there could be an adverse impact:

Consumer demand

With continuing economic uncertainty impacting consumer confidence, DFS foresee some customers deferring or reducing their spend on new furniture. The report states: “We believe that the underlying growth in our market over 2017 to 2019 has likely been between -1% to -2% per year, whereas a long-term average growth rate for the market is typically over 2%. A 1% change in our sales growth assumption would increase or reduce revenues by c.£10 million, and consequently could have an impact on profits and cash generation of c.£4 million.”

Border delays

Around 60% of finished goods that DFS sells are imported from mainland Europe or China. It forecasts that an increase in lead times could have a direct impact on profit and cash generation in the first financial year that delays occur.  The report states: “We have ensured our suppliers each have in place the necessary permissions for accelerated customs clearances and we have also encouraged the use of container routes where customs clearance can take place while ‘on the water.’ Our analysis shows that over 85% of our imports by volume are already taking place using containerised freight forwarders holding Authorised Economic Operator status. We also import raw materials (principally timber and fabric) to manufacture finished goods and we have confirmed that our partner suppliers have increased their UK stockholdings.”

Increased regulatory burden and other friction

DFS is reviewing any impacts on its ability to trade as a result of this.

Tariffs

DFS states: “We do not currently expect to see a material tariff impact, as our finished goods currently largely attract a 0% tariff under WTO terms and our business has experience of operating within the tariff regime for Far East imports. The UK Government has also indicated that they will defer the payment of duty due on all imports from the point of entry to being accounted for as part of companies’ VAT returns, which we believe will give the Group a cash benefit of over £3 million, which will help mitigate the working capital impact of any border delays. Notwithstanding this there may be additional administrative and other cost burdens associated with the chain of custody requirements to avoid tariffs being imposed on raw materials imports, although we do not anticipate these being costly to implement.”

Exchange rates

Changes in the sterling/dollar exchange rate are expected to impact the cost of DFS’s Far East imports. It states: “We hedge our US dollar requirements maintaining cover equivalent to 18 months of spend to give us increased time to respond to any such adverse trends. In the absence of any hedging, each one cent movement in the US dollar exchange rate has approximately a £1 million impact on PBT, prior to any mitigating actions. We anticipate our competitors would pass on any cost increases as a result of foreign exchange movements to the end consumer.”

Staff

Regarding the employment of EU nationals at DFS and within its supply chain, the report states: “At the time of writing, the Government’s position remains unclear as to whether those EU citizens without pre-settled or settled status will be allowed to work in the UK after the 31 October. We see the potential for wage inflation as companies compete to attract workers with appropriate skills and experience. To help mitigate this risk we continue to work hard on our employee engagement to seek to ensure we continue to benefit from employee loyalty, and relatively low turnover.”

The full report can be read here

Richard Davies, managing director of Cheshire-based Hattons Model Railways, says that trading internationally has prepared him for following WTO rules in the event of a no-deal Brexit

How prepared is Hattons Model Railways for Brexit?

I’d like to think that we are well prepared. We are a pragmatic operationally focussed company. We have grown an awful lot over the last 20 years and that’s through being very practrical and very IT-oriented. We have put the customer first by letting the technology drive the business.

The vast majority of our stock is made in China, so we envisage that there may be a few delays for stuff coming in through China, but it’s not really a major problem as we don’t source much stock through the EU. With regard to the purchases of stuff to help us run the business, i.e. packaging materials, labels and card and that kind of thing, what we have done is forward bought an awful lot of what we need to cover us for at least eight weeks after Brexit day. We did this for the initial March deadline and again we have done this for the next deadline. These sundry items are not expensive, so it hasn’t had a big impact on our cash flow, but without them the whole operation could stop. If anything, the only problem it has caused us is finding storage space for it in the building.

What percentage of Hattons Model Railways’ customers are based in the EU?

Of our £17 million turnover about 10% of that is to outside of the UK and just over half of that it to within the EU. From our point of view, because we are a very tech driven company and because the average order value is over £100, having the right IT systems ready is the best we think we can do for when there is any change over or move to WTO rules, so we can easily modify our systems to make sure that we can carry on shipping through our normal services. The software that we use to facilitate our international shipments is called  GFS Checkout. It is bulit in to our website ordering system and it will, if there are any changes i.e. in taxes, make that change automatically for us. We want to be transparent with customers with what we are doing and this system allows us to do that.

How has the fall in the value of the pound impacted on your business?

Well, after the referendum, when the pound crashed then what that meant for our international customers was that they were getting more for their money so we saw an increase in trade straight after the referendum. We have seen particular growth in custom from Australia and America since the fall of sterling, so that has been a benefit for us, but our costs are also going up for the products we are buying in. So it’s a bit foolish to celebrate the problems of sterling because they catch you on the other end. We do think that the pound is likely to fall further and with some of our suppliers in China we’ve actually paid some of our bills early and negotiated better rates.

We are one of the biggest firms in the industry and we try to be minimal hassle for everyone. I just wish Brexit was over with quicker really, but I suppose everyone feels the same way. I’m not daunted by moving to WTO rules, because we’ve been doing that for a long time with many other countries anyway.

The UK Government is cancelling holidays and putting minsters and civil servants on high alert to prepare for a No Deal Brexit on 31 October. As the Financial Times notes today: “The country is now run by people utterly focused on delivering Brexit and resolute in their readiness for that departure to take place without a deal.”

For three years since the referendum, many businesses have felt unable to plan ahead, because they didn’t know what form Brexit would take. But now we all know what the Government wants, ‘no ifs or buts’ as Prime Minister Boris Johnson has said.

This means that the moment has now come when every business – whether it deals directly or indirectly with the EU – must start to focus on what a No Deal Brexit will mean for them.  As a first step, that means understanding what the phrase ‘WTO rules’ actually means.

Check it out now by spending three minutes watching our BrexPlainer video describing World Trade Organisation rules.  It highlights 4 key ways that WTO rules might impact you: tariffs, market access, border checks and documentation.

• Tariffs are a form of tax, that could apply across a large range of goods traded with the EU
• Market access restrictions could be particularly important for services-based businesses
• Border checks will potentially lead to major delays for goods travelling in and out of the UK
• Documentation will be vital, to prove the nature and origin of your products

The key conclusion is that businesses that have planned ahead for Brexit will have a clear competitive advantage from 1 November.  It is, therefore, critical that you start to prepare now for WTO rules.  With just 11 weeks to go, there isn’t much time left.

The Country Land and Business Association and the Tenant Farmers Association urge the Prime Minister to mitigate the risks to the agricultural sector of a No Deal Brexit. Anna Tobin reports

In a joint leter to Boris Johnson, the Country Land and Business Association and the Tenant Farmers Association have stated that it is deeply undesirable to leave the EU without a deal, but urged him to do the following to minimise the impact of No Deal on the agricultural sector and maintain and develop market access:

• ensure continued access to EU export markets for agricultural commodities, for example through Tariff Rate Quotas under WTO rules.
• develope enhanced routes to market both at home (for example, through public procurement, as well as avoidance of any impediments to trade within the UK) and abroad, using the UK’s high standards for environment and animal welfare as a key selling point.
• Create a transition support package for primary producers who will see the value of their output undermined by EU tariffs in a way that considers the industry’s long-term future.
• Implement the import tariffs on food announced in March 2019, keep these under review and adjust according to market conditions, and perhaps extend to other products.
• Ensure tariff-free access to imported inputs for the agricultural industry, including agrochemicals, machinery and spare parts.
•  Commit to considering the migrant labour needs of the farming industry, with the ability to source labour from the EU or elsewhere.
• Regulate to ensure fair treatment of and fair returns to primary producers in the food chain.
• Legislate to ban the importation of any food ingredients or food products that have been produced using techniques which would be banned anywhere in the UK.
• Review the timing of the transition to a new policy platform and leave the current arrangements in place until the economic realities of operating outside of the EU are clearer.

“For some sectors in the rural economy, leaving the EU without a deal would be deeply damaging. But make no mistake, damage would be done to the European economy too. That is why we encourage both sides to return to the negotiating table immediately,” said Tim Breitmeyer, president of the Country Land and Business Association.

“It is incumbent on business groups now to work with Government closely and proactively. Our recommendations are designed to help Government mitigate the risks of No Deal and prepare for the future, giving a degree of certainty to the thousands of rural businesses who are dependent on a thriving export market.”

James Gray, national chairman of the Tenant Farmers Association added: “Leaving the European Union will bring both opportunities and challenges for the farming industry. However, it would be reckless to leave the European Union without a deal and without a package of underpinning measures for the agricultural industry. Severe restrictions to export markets through both tariff and nontariff barriers, cutting access to important migrant labour supplies and leaving us open to imports of food ingredients and products produced to standards banned at home would be calamitous for our country’s food and environmental security.”

Around a quarter of a million UK businesses, and many more in the EU27, will face major changes in their VAT arrangements if or when the UK leaves the EU without a deal on 31 October.

This is because under a No Deal (i.e.WTO) scenario, the UK will become a ‘third country’ in terms of its dealings with EU member states. The main changes will impact goods imported to the UK.

The good news is that one major potential disruption has been avoided by the Government’s decision to allow postponed accounting for VAT on imports. This will apply to VAT-registered businesses importing from any country, including EU member states, immediately after exit day. Consequently, businesses will be able to account for, and pay, VAT on imports with their usual VAT returns, rather than at the time of the import itself. This change has avoided potentially very serious cash-flow implications for SME importers.

HOWEVER, please note that other duties (Customs & Excise) remain payable prior to release of goods. We will elaborate further on these in a later Ed Note.

Importers will lose access to VIES (the VAT Information Exchange System) as the way to check counter-parties’ VAT numbers. HMRC indicates that it will set up a UK-based equivalent, but we have yet to see this.

Claiming VAT refunds after exit could become significantly more complex, with UK businesses losing access to the EU’s electronic refund system at 17:00 (UK time) on exit day. Thereafter, a business will need to claim VAT refunds using the procedures of the specific member state, not the EU itself. This brings added complexity, and an important need for preparation, because different states can have different:

• Claim deadlines
• Requirements for certificates of taxable status (to support claims)
• Requirements for local representation in the member state itself

In addition, for businesses receiving goods entering the UK as parcels, VAT will become payable on consignments valued below £135. The Government has decided not to extend Low-Value Consignment Relief to goods entering the UK from the EU after exit.

Exports of goods from a UK business to other EU businesses will be less impacted as they are currently zero-rated for UK VAT. Currently, the UK supplier compiles an EC Sales List, to allow reconciliation with any VAT due in the destination member state. Under No Deal, such exports would remain zero-rated for UK VAT, but the obligation to maintain EC Sales Lists would disappear.

However, UK suppliers of digital services will lose access to ‘MOSS’, the mini one-stop-shop for VAT returns across the EU. So they will need to register with MOSS in another member state, prior to exit day.

In summary, if you currently do business solely with EU countries, you need to understand the impending changes to VAT procedures. While we have highlighted a number of issues here, you need to look in depth at the individual changes impacting your specific business. Preparation can be expensive, but lack of preparation will certainly be more so.

Chris Johnson, managing director of Oxfordshire-based bearings supplier SMB Bearings, explains the frustrations that beset an SME trying to make a living in the Brexit era

How much of SMB Bearings trade is with countries within the EU?

We are wholesalers of specialist bearings and probably 40% of our business is with the EU.  We sell to companies all over the EU.

Many companies have set up EU outposts to circumnavigate some of the issues that Brexit may throw up, have you considered this?

I did look at it. One possibility was to set up a distribution warehouse in Dublin, for example, but we can’t really do that without knowing what is going to happen. It would mean taking on a warehouse with a commitment to possibly five years, employing a couple of people to work there to pack goods up and ship them across the EU and, if we come to a sort of arrangement where there is frictionless trade with the EU, then obviously we would have to get rid of the warehouse and get rid of the staff. I felt I couldn’t really do that. If the planning had been very clear from the outset, if we’d been told right you have two years and at the end of two years it’s going to go to WTO rules, then you can get on and do something about it, but because we never knew and we still don’t know its very difficult to plan.

What has been the reaction to Brexit from your clients in Europe?

Well a lot of them say we hope that this is not going to be a problem, but they do want to know what is going to happen. Our response is we don’t know, we are doing everything we can to plan. We have recently had authorisation for Inward Processing Relief, for example, whereby you can bring goods in and then as long as you prove that they are to be re-exported outside of the EU or, if we have left completely, outside of the UK, you can reclaim the duty. Which means that we can compete price-wise because we are not paying the duty coming into the UK and then having our customers pay duty if the goods go into the EU. The other thing that we have started applying for is Trusted Trader status, we started applying for this about seven or eight months ago.

Why is it taking so long to obtain Trusted Trader status?

Because everybody is trying to do the same! When we started it was not as busy as it is now, but we’re working with a consultant, a former customs officer, and we’ve been told it’s gone completely mad and customs are being overwhelmed. We’ve been told that customs don’t really have the right people, and a lot of the older people who know how everything works are taking early retirement because they don’t want to have to train up all the new people who are coming in. The person who is helping us says that you put a question to customs and you get an answer and then you put the same question to somebody a week later and you get a different answer, that’s how crazy it is at the moment, they are just struggling.

Have you looked at increasing your trade with the rest of the world?

We are doing more, but it’s difficult to break into new markets in a big way. It takes time, you can’t quickly replace a whole network of established customers right across the EU.

What was your feeling when the original Brexit date was delayed?

I suppose there was a sense of relief in as much as it means that there is still a possibility that they will do some kind of deal along the lines of a customs union or I think a lot of people like me, a lot of business people, just hope that the whole thing will go away and people will get fed up with it and just go forget it, forget we ever had a referendum. Although I know it’s not going to happen.