Brexit and supply chain disruption: what you need to know

As the 29^th March draws ever closer, a picture of what Brexit could look like is beginning to draw into view (i.e. unmitigated chaos). While much remains uncertain—particularly in terms of how the UK will exit the European Union—businesses should seek to clarify their own Brexit strategy to mitigate external confusion. Though the full implications of Brexit remain obscured, exiting the European Union may result in significant supply chain disruptions which in turn will affect your business, suppliers and customers. As if that wasn’t enough, these consequences could manifest in additional costs, compliance obligations and possibly delays. As a result, it is important that your business to consider and prepare for the impact of changes to customs and excise procedures, tariffs and rules of origin.

While there remains uncertainty over what any final Brexit deal might look like, if a deal is even reached, it is highly likely that Brexit will result in some supply chain disruption. This issue will primarily affect businesses trading goods with the EU, however, even those who do not should be aware of the potential impact on their suppliers or customers. Although the government will hope to reduce any disruption, businesses should be considering whether to take any steps to manage this risk.

The key risks to supply chain include:

• changes to customs and excise procedures
• impact of tariffs
• rules of origin

In such turbulent times, it is tempting to look to other businesses for advice, or for a template of best practice. However, in the same way that no two businesses are the same, there are also no identical modes of handling Brexit—what works for one company may not work for another. As a result, it is vital to evaluate your own business to pinpoint specific areas of impact and those which require your most urgent attention. In this article, we examine the key risks to supply chain management as a result of Brexit and provide guidance for practitioners who need to re-evaluate their supply chain using our Brexit Management Guide and Mini Action Lists.

In the event of a ‘no deal’ scenario, businesses will have to apply the same customs and excise rules to goods moving between the UK and EU as currently apply to goods moving between the UK and a country outside the EU. This means that businesses may need to prepare customs declarations, either import declarations or export declarations, as relevant. Goods may also be subject to separate safety and security declarations. Similarly, the EU may apply customs and excise rules to goods received from the UK in the way it does for goods received from outside of the EU.

In practice, the following steps can be taken to prepare for and mitigate against these risks:

1. Register for a UK Economic Operator Registration and Identification (EORI) number—any business importing goods from or exporting goods to the EU will need a valid EORI number
2. Work out how to submit import/export declarations and consider whether it is necessary (or preferable) to engage a customs broker, freight forward or logistics provider—businesses that want to submit these themselves will need to acquire the appropriate software and secure the necessary authorisations from HMRC
3. consider whether it would be appropriate or beneficial to use special customs procedures such as customs warehousing (allowing businesses to store goods with duty or VAT payments suspended) or inward processing (allowing businesses to import goods from non-EU countries for work or modification in the EU)

check contracts—you will need to ensure the international commercial terms (Incoterms) reflect a change in status, ie that you are now an importer/exporter

establish the correct classification of the goods and consider the impact of possible tariffs—HMRC has published tariff information and commodity codes needed to classify goods

Impact of tariffs

In addition to procedural issues, Brexit may result in the imposition of tariffs on imports and exports that were not previously subject to them. This includes products imported from and exported to the EU. It also includes imports from and exports to countries with which the EU has existing trade deals, eg South Korea, Israel and South Africa. Following Brexit, the UK will no longer benefit from these deals and there is a significant risk that, at least for a time, no replacement arrangements will be put in place. Not all products are the subject of tariffs, so businesses should assess and quantify the impact of potential tariffs.

Rules of origin

For UK businesses importing or exporting goods, the origin of those goods is crucial to their tariff treatment and whether they are subject to any other restrictions. Brexit creates significant complications for how the origin of goods is treated. EU rules and some free trade agreements allow origin to be cumulated, so that a product retains its origin even if it has undergone processing in or incorporates parts from other countries, eg a car part containing components from the UK, Germany, Romania and Spain would typically be deemed to have EU origin. Post-Brexit, in the absence of an agreement otherwise, UK components will no longer be able to count towards EU origin and vice versa. This means that a car assembled in the UK but containing a majority of parts from elsewhere in the EU might risk not being classed as having UK origin.

Businesses should check their supply chains to ensure that they know the origin of products they buy or sell.

Using our Supply chain disruption mini action list, companies can map areas of weakness and strategically plan.

To access our full Brexit Management Guide, please click here.