Speakers at a recent conference on the impact of Brexit on supply chains argued that there was a serious risk of significant disruption and urged businesses to make contingency plans now. In this article, we look at what businesses can do to protect themselves against the risks posed by Brexit to their supply chain.
What's the problem?
A representative from UK Customs explained that at present, transporting goods from a factory in the West Midlands via the Channel ports/Channel Tunnel to Germany (or vice versa) takes around 12 hours. However, after Brexit – assuming that the UK leaves the EU Customs Union and the Single Market - it is estimated that delays arising primarily from increased border red tape could result in a journey time of up to 80 hours (in a worst case, ''no deal'' scenario). A substantial part of the delay would arise because the Channel ports/Channel Tunnel are not currently equipped to handle large volumes of customs checks (and even with massive investment in new facilities and technology, it is difficult to see how they could be made "Brexit-ready" by April 2019).
Surely both sides will want to avoid this?
Whilst measures could no doubt be agreed with the EU to postpone the introduction of customs controls and/or to speed up customs processes, such arrangements are complex and take time to negotiate. Although there now appears to be somewhat greater optimism that talks on trade issues will be able to start in early 2018, the Republic of Ireland is adopting a tough line on the border with Northern Ireland (which raises many of the same issues that would affect EU-UK trade via the Channel ports/Channel Tunnel). Even if a provisional agreement were to be reached on transitional arrangements or customs early in 2018, both sides have adopted the mantra "nothing is agreed until everything is agreed" – so there will be a risk that any such provisional agreement will unravel at the last minute. A representative from the Freight Transport Association said that negotiators on both sides had indicated that, although they very much hoped to avoid it, a "no deal" outcome could not be ruled out – and businesses should prepare for it, rather than adopt a "wait and see" approach.
Such an outcome would, admittedly, have adverse consequences for both the UK and the EU – but many commentators take the view that the UK is likely to come off worse. Even if the UK unilaterally decided to adopt a very "relaxed" approach to customs checks (or even waived them altogether), our view is that the EU would be highly unlikely to follow suit (see this article); it only takes delays to build up on one side of the Channel for the entire system to grind to a halt, as demonstrated by the impact of extra security checks imposed by French authorities after the terrorist attack in Nice last year (which led to very substantial tailbacks of traffic on roads to Channel ports). So what can UK businesses do to mitigate these risks?
Map your supply chain
- It is not sufficient to know who your immediate supplier is; you need to know the identity of your supplier's suppliers, all the way along the supply chain. In particular, some suppliers further down the chain may well be SMEs who are less likely to be well prepared for Brexit.
- Nor is it sufficient to focus solely on goods which are sourced from the EU. Many goods from the rest of the world come into continental ports such as Rotterdam and are then distributed by HGV to the UK. The focus should be on how the goods that your business relies upon come into the UK i.e. are they entering by HGV via the Channel Ports/Channel Tunnel?
- Work out the implications for your cashflow which are likely to arise from changes to VAT treatment on exit from the EU – for more detail, see "Brexit: Tax Implications"
Do you rely on goods entering the UK via the Channel ports/Channel Tunnel?
If the answer is yes, consider the following:
- Can you switch to goods from the rest of the world which arrive in the UK by ship at UK ports rather than by HGV from the continent? UK ports which deal with the rest of the world should be substantially less vulnerable to disruption, as efficient customs systems are already in place.
- Can the goods be transported from the EU to the UK as unaccompanied containers, using short sea shipping? Again, the advantage here is that the goods would be able to enter the UK at ports which are already well equipped to handle customs checks. However, the overall journey time is likely to be significantly longer than the current journey times of HGVs via the Channel ports/Channel Tunnel, so this may not be an option for perishable goods or "just in time" supply chains.
- Order goods earlier than usual and build up a higher level of safety stock, particularly in the run-up to the UK's exit date in 2019. This may involve finding extra warehousing space and adjusting cashflow projections.
- Can you switch to a UK-based supplier? In theory, a UK supplier should not be affected by border delays resulting from Brexit – but you will need to check that any such supplier does not rely on inputs from the EU or the rest of the world which enter the UK via the Channel ports/Channel Tunnel.
Authorised Economic Operator status
For some businesses, there may be no realistic alternative to the use of the Channel ports/Channel Tunnel as part of their supply chain. These firms may wish to consider seeking Authorised Economic Operator (AEO) status, which would enable them to make use of streamlined customs procedures, thus reducing the potential for delays (to some degree). In some cases, it may be sufficient that your wholesaler or logistics provider has (or is applying for) AEO status. But time is short – the AEO application process takes around 4-5 months and most businesses will probably need a similar period to prepare before they are in a position to start the process. It should also be borne in mind that AEO status is by no means a "magic bullet" solution – in particular, a mutual recognition agreement with the EU will be needed if the AEO system is to function as effectively as possible after Brexit.
Businesses should also ensure that they – or their suppliers – are prepared for the documentary requirements of customs formalities. For example, at present, businesses importing goods into the UK from outside the EU must complete a detailed "Single Administrative Document" and an "Entry Summary Declaration". Additional specialist documentation is required for more highly regulated goods or materials. In our view, it is likely that similar requirements will be maintained after Brexit. Given the highly technical nature of these documents, businesses may wish to seek assistance from specialists such as customs brokers.
Check your contract terms
Finally, check what your supply contracts say about who should bear the cost of, for example, compliance with new customs formalities and additional duties/tariffs. The default position as regards duties/tariffs is that the seller is entitled to recover the additional duty from the buyer (see section 10 of the Finance Act 1901) - although this can be modified by agreement. For example, if the contract is on a Delivery Duty Paid (DDP) basis, then the seller must bear the cost of duties/tariffs.
For further discussion of the impact of Brexit on contracts, see this briefing.