21 January 2019

Ready for Brexit: Your Supply Chain - Briefing 3

How to evaluate the risks around increases in tariffs and duties on goods which apply when exporting goods to the EU from the UK

Continuing our Commercial team’s series of briefings to help your business’s Brexit steering group work through the direct risks associated with different possible outcomes and their impact on your supply chain management, we look at the risks in relation to an increase in tariffs and duties applicable to goods being exported from the UK to the EU.

Taking our inspiration from the approach taken by Next plc in a report on its internal preparedness for Brexit released last year, assessing this particular potential risk of increasing export duties, like the import angle we looked at previously, is an area which benefits from categorising the different type of risk and then the different routes taken by exported goods in order to understand the exposure created for a business.

The potential risks seem to break down into the following categories:

  • the risk of incurring double duty;
  • the risk of paying duty on selling prices of goods rather than their cost price; and
  • the risk of stock losing its Generalised System of Preferences or GSP status on entry into the EU.

Incurring double duty

The risk here is that a UK business pays import duty on goods it brings into the UK from outside the EU and then when those same goods are exported back out to a country within the EU, it will incur a second or double set of duty at that time of export. One traditional solution to this risk is the use of customs or bonded warehousing to ensure that goods don’t pay duty on entry into the UK, but only pay duty once they leave the bonded facility and go to their country of final destination.

Use of customs or bonded warehousing is a long-standing method of dealing with this risk.  As with several aspects of being prepared for Brexit, if this is something your business has already used it shouldn’t be too big a problem to plan to increase the facility. However, for any business which has never used such facilities before this could be a new aspect that needs looking into sooner rather than later. Other methods of delaying or relieving customs duty for imported goods until they get into free circulation are also possible such as inward processing or temporary admission schemes.

Paying duty on selling price rather than cost price

One risk for companies that sell goods directly to customers in the EU, for example through online sales, is that when their customers receive goods those customers are liable to pay duty based on the sale price, as if the customer were the importer of those goods into the EU. This could present a considerable risk to customers based in the EU if UK businesses need to increase prices to reflect increased duties. In effect those customers would be paying duty on increased duties.

At present consumer purchases of goods with a value of less than €150 coming into the EU do not incur duty. However, this threshold is an area which could be changed by the EU post-Brexit and so any business relying on this threshold for ensuring its consumers are rarely hit by duty on their purchases, may want to consider this element as a relatively high risk item of potential shift in the future, although perhaps more a medium to long-term risk rather than a short term exposure.

In terms of businesses whose goods are always in excess of the consumer purchase threshold, there will be a need to consider other alternative solutions to this potential issue for their customers. It is likely that one of the best options, for a global group of companies, is to try to balance stock handling across other parts of the group located elsewhere in the EU. Perhaps using warehousing facilities within the EU to manage EU sales and thus avoid both the double duty risk identified above as well as the risk of customers’ incurring import duties on selling prices of goods.

For smaller businesses or UK-only based businesses, this area of risk is going to need some working through if it constitutes a large proportion of UK into EU sales above the consumer threshold. Alternative options on sales routes, establishing group subsidiaries or warehousing use when exporting into the EU might well need consideration to reduce its potential negative impacts.

Stock losing its Generalised System of Preferences or GSP status on entry into the EU

As we looked at in an earlier article in this series, countries which have GSP status are essentially a group of developing nations given preferential or zero tariff rates as an exemption to the general World Trade Organisation (WTO) rules. When the UK leaves the EU, there is a risk that goods that come into the UK from a GSP country and which are then subsequently exported back out to an EU country will lose their GSP status and so incur full duties on those goods.

The European Free Trade Association (EFTA) countries of Norway, Switzerland, Iceland and Lichtenstein, as well as Turkey, Macedonia and Serbia, have agreements with the EU that mean stock transferred between those countries and the EU can maintain their GSP relief (known as the Common Transit Convention or CTC). Indeed, the CTC is broader than just addressing GSP relief. It means that where countries outside the CTC would have to pay duties each time their goods cross a border, those within the CTC can move goods across a customs territory without the payment of duties until the goods reach their destination.

The Government have now confirmed that they have successfully negotiated agreement to remain in the CTC post-Brexit, regardless of whether there is a new trading arrangement negotiated with the EU or in a no deal scenario. This is a key point for those businesses trading in goods globally as it is a significant step to ensuring those businesses only need to make customs declarations and pay import duties on goods when they arrive at their final destination.

To make use of the CTC scheme, proof of country of origin of any goods is required when reaching the destination country. It is worth ensuring not only that your business can secure and provide such proof documents, but also that any contracts with suppliers include obligations on the supplier to provide the necessary documentation and notify your business in the event of any goods losing their preferential tariff treatment or status at any time, so you can be made aware of unanticipated duty charges taking effect. This is of particular relevance where goods originate from GSP countries as such goods risk losing their preferential or zero tariff rates in the absence of such documentation.

If you would like any assistance in evaluating the risk of increased export tariffs for your business in its preparation for Brexit, please do get in touch with any member of our Commercial team whose contact details can be found here.