End of Brexit transition: scrutinise your staff, costs and contracts
7 December 2020: What should UK companies – and particularly SMEs – be concerned with in the countdown to the end of the Brexit transition period? Staffing, extra costs and contract terms are the three big questions, says Paul Samrah, Partner in Moore Kingston Smith.
“Audit your staff. If trading in goods, know your exposure to additional costs. Look at your contracts, and make sure you have spoken to customers and suppliers, so you are clear what happens if there are delays,” says Samrah.
As lead Brexit Partner at Moore Kingston Smith, Samrah has accumulated a wealth of knowledge around the transition of the UK out of the EU but concedes there are still unknowns.
He points out that a deal between the UK and the EU will not alter the fact that there will be change. Yes, a deal is likely to remove tariffs on certain goods – or all goods – but 31 December 2020 is a cliff edge, after which there will be a new business landscape.
“The EU27 is one border area,” says Samrah. “With the UK outside it there will be two different markets.” This is what is driving emotive news stories depicting long queues of lorries at ports.
There are four practical questions all companies should ask themselves at this time. These are:
- Who can I employ?
- Can I get my goods across the border?
- What standards must products meet?
- What charges will I have to pay?
The answers to the first two questions are known but the answers to the last two questions remain elusive, says Samrah.
So, who can you employ? The answer is embedded in the settled status and pre-settled status provisions. “Appraise your workforce,” says Samrah. “They are your biggest assets. And don’t forget to appraise their families if relevant.”
He continues: “And don’t forget the situation in relation to recruitment is changing in that companies wishing to recruit from the EU will have to become a sponsor.” There are significant costs and time commitments associated with taking on the sponsorship role, so businesses need to be clear about the impact of those costs and time commitments on their operations.
Getting goods across borders is also a known quantity. “We know where we are with that,” says Samrah. “It means lots of virtual paperwork. An estimated 50 million customs declarations made annually will increase to around 300 million at the end of the transition period.”
He continues: “But who will take on these customs declarations? Freight forwarders? If so, will they charge? If the documentation is incorrect, the goods will be stuck. Will the freight forwarder be able to cope? Will they have the right information? Will they know the origin of the goods, the correct commodity code and the right tariff?”
Any business that takes on the customs declarations role may have to employ someone to do it. However, recruitment and training grants are available to employ someone to do it on behalf of any business that makes an application before the June 2021 deadline, but on a first-come first-served basis.
“However, the costs of all this change should be budgeted for and included in businesses’ forecasts,” warns Samrah.
His third question relates to contracts and regulation, for example food labelling and medicines. We are waiting to hear more about ‘mutual equivalents’ in any deal that is struck between the UK and the EU. We still do not know whether a product that falls within a certain category, exported from the UK to all EU27 countries will need a different label for each country. That could mean 27 labels for 27 countries, he points out.
Finally, we come to charges payable in the post-transition environment. These are unknown. We know there will be trade-offs around things such as State Aid and fishing rights, but we do not actually know what the final position on tariffs and regulation will look like yet.
So what should businesses do? “Look at your contracts,” says Samrah. “Look at the International Commercial Terms (Incoterms) in those contracts. You may need to adjust them to mitigate who will be responsible for payment of tariffs and duties.”
Then there is the transfer of personal data from the EU27 into the UK at the end of transition. “Businesses may need a personal representative located in one of the EU27 states if they plan to send personal data into the UK,” points out Samrah.
All the extra costs will come as a blow to businesses on top of an already very difficult year. The costs of customs declarations, the impact of tariffs and the employment/services costs that may relate to these – these are all considerations for businesses.
While the tariff situation is still hanging, we do have the UK General Tariff to refer to in relation to goods imported into the UK in an absence of a deal from 1 January 2021; we just don’t know the position in relation to goods flowing in the other direction. However, Samrah asks: “Who will bear the costs of these tariffs? The EU exporter or the UK importer? A trade agreement may reduce these tariffs to zero.”
Against this backdrop of uncertainty, trade deals are actually being done with other countries. There is one in place with Japan and those with Australia and perhaps the US are heavily discussed, he points out. But the worry remains: will we revert to WTO rules for EU trading if no deal with the EU is done. This brings us full circle to reviewing Incoterms in contracts.
Then there is VAT. “Of course, this is largely recoverable,” he says, “but who will pay it initially?” This will have cashflow implications for the paying business.
The bottom line is that there will be time, money and energy spent as we move out of transition into the new trading environment on 1 January 2021. Yes, there are still uncertainties but what is certain is that there will be change, regardless.