Robert Facer, VAT director at Menzies LLP says you should make VAT part of your supplier negotiations ahead of Brexit.
While there is still a degree of uncertainty around the UK’s post-Brexit trading position, a key concern for manufacturers is likely to be the impact of VAT and customs duty changes when importing goods from the EU. When discussing the post-Brexit future with key suppliers, VAT and customs duties should be high up on the agenda. In particular, helping procurement partners to establish a hub to hold stock in the UK could minimise the impact of unwanted customs delays.
As well as the loss of VAT-free trading after Brexit, customs duties would increase costs for businesses moving goods in and out of the EU. Leaving the single market and Customs Union will also effectively create a new customs frontier, which could cause considerable delays in the movement of goods between the UK and EU and create new administrative burdens. For manufacturers reliant on importing goods into the UK within short timescales, for example, automotive manufacturers (AMs) implementing ‘just-in-time’ manufacturing, this could prove particularly disruptive.
If it does not already form part of their considerations, UK manufacturers should waste no time in considering their sensitivity to VAT changes. This should include not only evaluating which EU suppliers they are using but the particular timescales they are working to.
Once businesses have analysed their individual situation, assisting suppliers in establishing a UK hub or distribution point could help to avoid supply chain disruption. Before making such contingency arrangements, manufacturers should begin by holding discussions with suppliers to establish how this approach would work in practice.
Firstly, it is essential to be certain that setting up a UK hub would be economically viable, including a consideration of how such a venture would be financed. It goes without saying that there is little point investing in a distribution hub if the initial cost outlay causes any benefits to be outweighed. As such, manufacturers should define an approach for dealing with additional costs, for example, deciding whether these will be absorbed by suppliers or passed onto customers by way of increased prices.
Other considerations are likely to include the kind of facility needed, taking into account the scale of manufacturing operations, location and how the facility should be organised. For example, it may be possible to set up a bonded warehouse facility, which allows goods arriving from the EU to be stored free of import VAT and customs duties, until such time as they are shipped from the warehouse, therefore helping cash flow and avoiding delays. Depending on the requirements of the individual business, outsourcing to a third-party logistics provider or bonded warehouse facility could prove the most effective and cost-efficient means of distributing goods reliably and in line with manufacturing deadlines.
Some organisations may feel that big, structural changes, with their associated cost implications, should be delayed until further information is available about the outcome of the ongoing Brexit negotiations. However, depending on the business’ sensitivity to VAT changes, establishing a UK hub at the earliest possible opportunity may be critical to avoid unwanted delays.
Careful planning when taking on new suppliers or renewing supplier contracts can also help manufacturers to mitigate post-Brexit VAT changes. In addition to seeking out domestic suppliers wherever possible, removing the risk of customs tariffs, it is important to clarify which suppliers will be responsible for processing increased administration.
In order to protect against any negative impact of VAT changes on cash flow, manufacturing firms should also consider seeking HMRC approval for a deferment account. Allowing importers to charge tariffs against the account to be paid off the following month, these could prove particularly useful after Brexit, allowing businesses to minimise potential disruptions to cash flow. HMRC is also in the process of introducing a customs declaration system, which could help to prevent unwanted delays on cross-border trading by increasing capacity for processing customs declarations.
As the Brexit deadline moves closer, we are also likely to see more businesses applying for Authorised Economic Operator (AEO) status. Marking suppliers as reliable exporters or importers, this can help to ensure that customs processes run smoothly by avoiding potential customs delays.
For a number of manufacturers, strategies such as establishing a distribution hub may prove an effective means of minimising the impact of Brexit once the UK leaves the EU. However, it is important to bear in mind that there is no one-size-fits-all solution. By taking a meticulous approach to auditing the business’ sensitivity to post-Brexit cost increases and delays, manufacturers can protect their bottom line and maintain a stable trading position in the years to come.
Robert Facer is a VAT director at accountancy firm, Menzies LLP.