It is important for businesses – and their accountants – to understand there will be more than just customs costs when the transition period ends.
Borders create friction, and friction adds costs to businesses. The United Kingdom will have borders against Europe from 1 January 2020, and businesses that trade with Europe need to plan for the reality of higher overheads and workloads.
Unfortunately, even if there were an eleventh-hour deal with the EU, this would still be the situation – at least, in the short term. So businesses of all sizes need to begin thinking through how they will operate in the next phase of international trade.
Martin Williams, finance and HR director, UK for European manufacturer Rittal, is well aware of the admin costs that the sector might be facing once the Brexit transition period ends. The transition team’s list of actions currently has more than 30 items on it. Import and export, systems requirements, packaging changes, material changes, resourcing and CE marking are all considerations.
“We’ve recruited two permanent import/export staff members,” he explains. “This is the third time we’ve gone through these preparations, but each time we do it, not only is there a cost, but other things come out of the woodwork; things change slightly. There are nuances. It does become almost a totally different project each time.”
While there are more explicit costs around Brexit such as insurance and storage costs, it is the hidden costs in the time taken on administration, that will be the bigger burden. “Clearly the difficulty is: what could staff have been doing if they weren’t doing this? What value-add work are we missing out on? That’s the unknown. The explicit costs are relatively okay to deal with you just take a judgment call, and we’ve tended to do that on a conservative basis, taking your worst-case scenario view. But it’s the intangibles that I think are the challenge.”
Businesses aren’t prepared
A recent EY survey found that just one in nine businesses properly understood the risks and costs involved with the end of the transition period. At the same time, one in four businesses have done very little to mitigate the potential risks and costs they might face. The COVID-19 pandemic has played a part in that – over 55% said that COVID-19 had impacted their Brexit preparations in some way.
Helen White is co-founder of lighting retail start-up Houseof. She says that Brexit preparations have been a struggle. “As a business we are trying our best to be Brexit ready but we know there will be things we just haven’t planned for,” she says.
The company wants to sell international, so decided to set up a hub in mainland Europe to service the EU. This alone has increased general admin around product storage. Adherence to safety standards in different territories also creates additional administrative costs. “At the moment, the EU and British safety standards are closely aligned but in future, this may not be the case. We may find that they become disjointed and we ultimately have to test and label products to two sets of standards, which really increases our costs. “
Depending on the sector, businesses will commonly face admin costs around the following areas:
- Customs: importing and exporting goods will involve a lot more paperwork
- Recruitment: Dhruti Thakrar, head of immigration at Edwin Coe LLP, says that hiring skilled staff from overseas will involve a lot more admin, particularly around the sponsor licensing process
- Logistics and storage: businesses moving a lot of goods between the UK and the EU will need to carefully manage their stock holdings, which increases admin
- Product safety standards: products sold in the UK and EU will have to be assessed twice for product standards and carry both the EU CE Mark and the new UKCA mark.
An issue, with or without a deal
At the time of writing, it is still unclear whether the UK will reach any kind of trade deal with the EU, though the Prime Minister has told businesses to prepare for a no-deal scenario. Stefan Tärneberg, director, Solution Consulting at supply chain consultancy BluJay Solutions, says that in the event of no trade deal, UK companies will struggle to meet the demand for goods.
“The sheer volume of customs declarations organisations will need to handle as the UK becomes a ‘third country’ is unprecedented,” he says. “UK companies will need to complete 400 million customs declarations a year. Last year, the figure was 5m. That’s an increase of 8000%.”
Companies will need to pour hours of skilled manual labour into completing each declaration, says Tärneberg. Mistakes will cost time and money on top of the increased admin. “The UK will spend £4bn just on customs paperwork next year. We’ll all foot the bill as prices rise in shops, and our favourite products disappear from shelves entirely.”
The strain will be lessened somewhat in the event of a deal, but the complexity will still be there, he explains. “Companies must take matters into their own hands and automate the management of these declarations. Those which are so far unprepared will have a huge shock come 1 January.”
What companies need to do to prepare
The primary piece of advice that businesses should follow is to start preparing now. Businesses must assess where their administration costs lie and start planning to ensure that they don’t bite too hard, particularly in the context of COVID-19, where additional costs could take a business from a going concern to the brink of insolvency.
“With so much hard work and resilience shown over the last six months to continue trading, we’re urging businesses to review the practical commercial actions they need to take that will, at the very least, allow them to transition into a post Brexit trading environment,” says EY’s Brexit strategy and trade leader Sally Jones. “Companies that have managed and survived the impact of COVID-19 can’t allow their lack of Brexit preparedness to be the final straw that breaks the camel’s back.”
Mark Rowland is a journalist and former editor of Accounting Technician and 20 magazine.