Before Brexit companies could get supplies or products from the UK, and send them there, without any problems. The European Single Market is built on four freedoms: goods, services, labour and capital. However, with Brexit set for March 29th, 2019, any goods going into or out of the UK may have to pay customs duties, face delays due to stoppages and inspections, and incur much longer waiting times. The free flow of goods will be no more. These measures are likely to have severe impacts on Irish businesses.
If you are in an industry where profit margins are tight every penny counts, and every stoppage adds to costs, says Prof Donna Marshall of the UCD Smurfit Graduate School of Business.
“That’s why most supply chains try to keep the movement of goods between countries as frictionless as possible. The less friction, or stoppages, the less cost is incurred.
“If the Brexit negotiations continue as they are, with no resolution and no agreement, this will lead to controls into and out of the UK. Ireland, more than any other country in the world, will have increased friction and increased costs. The complexity comes from having to deal with new controls and charges and waiting times at ports. In preparation for this the Irish Government has announced that it is hiring 1,000 new customs officials.”
Susan Deegan, manager of the supply chain team at CPL recruitment, says there is a huge amount of uncertainty surrounding Brexit.
“Companies are trying to prepare for the unknown. I have clients who have cancelled roles because they’re trying to tighten their belts in preparation for what’s to come.
“I’m probably seeing the biggest impact on smaller clients because they wouldn’t have the funding to go to consulting houses to get advice. The larger companies are investing in being Brexit-ready, they’re bringing in consultants from the big four and other houses to advise them. I work with the big four, and they will even say we have no idea what is going to happen. At least if we knew the outcome then we could prepare,” says Deegan.
Extremely vulnerable
All of this leaves Irish businesses extremely vulnerable, according to Marshall.
“Irish manufacturers are part of global supply chains. Much of our supplies coming into Ireland are from or through the UK, and many of our products, particularly food, go into or through the UK. So we are extremely vulnerable.
“However, it does depend on the product. If the product is very high value, such as medical devices or pharmaceuticals, although the impact will be felt, it won’t be as severe as for low-value products such as food, where logistics costs make up a much higher percentage of overall costs. Those products are much more vulnerable to the impact of additional costs.”
Deegan agrees that the food sector is most likely going to be one of the most affected industries.
“If there are extra customs regulations in place at UK ports and, for example, there is fresh fruit sitting there, that’s not going to work for their current supply chain. Some of my food clients have supply chains running down through the UK, but if there are extra regulations in place that may slow them down a day or two. They are going to need to change that altogether.”
Pharmaceuticals are also going to be affected, with a rise in the level of Asian and Chinese pharmaceuticals looking to set up operations in Ireland, according to Deegan.
Marshall says most Irish companies are reliant on the UK for one of four reasons: because that’s where a main market is; because they get supplies from the UK; or their products have to pass through the UK to get to main markets in continental Europe; or their supplies have come through the UK from continental Europe.
‘Land-bridge’
“Most road freight uses what is known as the ‘land-bridge’: getting ships from Ireland to the UK and then travelling by road across the UK to get to continental Europe. Something like 80 per cent of road freight from Ireland to Europe goes through the UK. This is mostly due to cost, availability and timing. It’s about 10 hours’ drive to Europe using the land-bridge, while shipping directly to continental Europe can take between 20 and 40 hours.”
For this reason, Marshall is advising all Irish companies to plan for a hard Brexit.
“If the UK is your main market, or you get your supplies from the UK, you need to plan for waiting times for customs inspections. Think about the perishability of goods, ways of maintaining goods that are waiting for a long time. Are there ways you can make customs checks easier?
“Long-term, think about diversifying your transportation, markets and your suppliers to continental Europe. At the moment Belgium and Germany are some of our biggest export markets, and I would expect the shift to these other European countries to become even more pronounced.” she says.
Marshall adds that companies need to look for the silver lining, and there are amazing benefits for those who get real visibility into their supply chain.
“If all sides agree on an alternative arrangement by March then the worst that could happen is that Irish companies have gained much-needed insight into their supply chains. If there is still no agreement then Irish companies are prepared and will not be caught unawares.”
THINGS TO KNOW
In the context of a hard Brexit, what do Irish companies need to understand from a customs and VAT perspective? Fionn Uibh Eachach, director at KPMG, explains.
From an indirect tax perspective, covering customs and VAT, companies should look at their supply chain in detail. They need to identify what goods are flowing in and out through the UK.
It’s about quantifying the tariff impact. For businesses that are heavily reliant on trade with UK that is from a few perspectives:
1. They may get raw materials from the UK so the import of those goods will potentially have a customs tariff attached.
2. The non-tariff costs – customs administration.
3. The import VAT – bringing goods in will now give rise to an import VAT charge. This could be at 23 per cent, another fifth of a cost which businesses don't have to fund at the moment. Where they are going to find that is going to be tricky, especially for businesses with tight margins.
For goods moving from Ireland to the UK, and a lot of Irish business have predominantly UK-related trade, they are looking at the potential imposition of tariffs on goods being imported into the UK as well as all the other non-tariff customs administration. Import VAT shouldn’t arise in the UK because they are proposing to implement a reverse charge or a VAT referral.