30 July 2021 • 26 min read
Find out if your Business is Brexit-ready?
What is Brexit, no-deal Brexit and the impact of Brexit on trade? How Brexit will impact the logistics sector and India. Know how to be Brexit ready.
Brexit became reality on January 31, 2020, with the United Kingdom (UK) exiting the European Union (EU). A transition period is underway during which the UK continues to abide by EU rules while trying to reach an agreement with the EU on their future relationship, most importantly on trade. The transition period ends on December 31.
Starting January 1, 2021, Brexit is expected to cause major tremors in international trade. Your business will be impacted if it buys or sells goods/services to or from the UK, if it moves goods through the UK, and if it uses goods manufactured in the UK to trade under preferential schemes with EU members. This piece explores the challenges of doing business in a post-Brexit Europe. Read on to find out:
- What is Brexit?
- What is a no-deal Brexit?
- How will Brexit impact trade and logistics?
- How will Brexit impact India’s trade ties with the UK and EU?
- Tips to be Brexit-ready
What is Brexit?
Brexit is a combination of the words “Britain” and “exit”. In 2016, the UK government called for a referendum or vote on whether the country would leave the EU or remain a part of it. Fifty-two per cent voted to leave. In 2017, the UK gave formal notice to the EU to quit the bloc it had been a part of since 1973. With the UK – comprising England, Scotland, Wales and Northern Ireland – out, the EU now has 27 members.
Since its exit, the main challenge for Britain has been to strike a new free trade agreement (FTA) with the EU. An FTA encourages trade between countries by eliminating barriers such as tariffs. Should the deal materialise – though it appears unlikely – it is expected to eliminate tariffs but not border checks. The most likely outcome seems to be a no-deal scenario, what is called a “hard Brexit”. And this has businesses worried.
What is a no-deal Brexit and its Challenges?
While the UK was a part of the EU’s Single Market and Customs Union, goods and services moved freely between their territories inviting zero tariffs and minimum checks. Now that the UK is out of the Union, and if it ends up without a trade deal, businesses will face both border checks and tariffs. Tariffs both in the form of customs duties and charges arising from new customs requirements.
Additionally, UK-EU trade will be governed by World Trade Organisation (WTO) rules, which means both sides would likely impose tariffs on goods manufactured in each other’s territory.
A hard Brexit also means Britain is free to negotiate trade deals with other countries. While in the bloc, it was automatically a part of 40 EU deals with 70 countries. Since its exit, it has managed to close 20-odd deals with 50 of those countries. These deals could come into effect on January 1.
How will Brexit impact your trade?
The key changes that await importers and exporters on January 1 are:
1. Customs duty and VAT:
If there is no deal, you will have to pay customs duties on goods moving between the UK and EU. In addition, you will pay import VAT (value added tax) on goods above £135. To avoid hold-ups on account of VAT payment at the border, the UK has proposed postponed VAT accounting, which allows you to defer your payment to the time you file your VAT return. To be eligible for this, your business must be registered in the UK for VAT and your VAT registration number must be included in your customs declaration.
2. Security checks:
Goods crossing the UK-EU border will be subject to:
- Documentary checks to ensure the goods have the correct paperwork
- Identity checks to make sure the goods match their description on the documents
- Physical checks for certain classes of goods such as potentially dangerous goods (pharmaceuticals, chemicals, firearms), goods requiring sanitary and phytosanitary certification (live animals, plants, animal/plant products), controlled goods at risk of being smuggled (endangered species, precious stones)
There will be no checks on the border between Northern Ireland (UK) and the Republic of Ireland (EU) under the Northern Ireland Protocol, which is part of the Brexit Withdrawal Agreement.
3. More paperwork:
The introduction of border controls means more paperwork.
- You will need to file customs declarations when you import to, export from or move your goods through the UK. Her Majesty’s Revenue and Customs (HMRC), the UK’s tax collection department, expects 270 million additional customs declarations annually from just UK companies importing from the EU
- Your carrier will be required to file, on your behalf, an advance Safety and Security Declaration (SSD) with S&S GB, the UK’s Safety and Security system
- You will need to apply for a Great Britain-prefixed EORI (Economic Operators Registration and Identification) number to import or export to/from the UK. An EORI number is a unique ID used by the EU to record customs data. It has two parts – the country code of the issuing member state (GB in Britain’s case) followed by the unique number. If you trade with the EU, you might already have an EU EORI number. Some shipping lines have made it mandatory for the GB EORI to be included in the Shipping Instructions
- You might have to register for VAT if you haven’t already
- With import-export rules for certain goods (food, alcohol, tobacco, seeds) set to change, you might need to update licences and certificates
4. Border delays:
Currently, it takes an estimated two minutes for goods to move between the UK and EU by truck. With a border infrastructure now in place, delays are inevitable. A leaked UK government report warns that January might see 7,000 trucks – the UK’s preferred mode of transport – queued up at England’s Dover port because some vehicles might not have Brexit-compliant documentation. If goods are delayed, they might need to be stored at ports, which are already short on space. The Goods Vehicle Management System, the UK government’s software solution for quick border verification of customs documents, is reportedly still not ready.
5. Customs representation:
Under new rules on customs representation, you will need to hire a customs agent to complete your customs declarations if:
- You export goods from the UK to the EU but don’t have a registered office or permanent place of business in the UK
- You are a UK-established business that imports goods to the EU but has no EU entity
- You are an EU-established business that imports goods to the UK but has no UK entity
The customs agent will be liable for all information in the declaration, including for any potential fines. As such, many agents might be unwilling to take on such a responsibility. For the exporter/importer, hiring a customs agent means additional expense.
6. Rethinking supply chains:
A hard Brexit might force businesses with UK operations to move their supply chains out of the EU. The EU accounts for 54% of all imports into the UK and Brexit makes these supply chains uncertain. However, finding an alternative supply chain that can deliver quality goods on time and at an acceptable price is easier said than done.
How will Brexit impact the logistics sector?
The logistics sector, given its role in cross-border movement of goods, is expecting a huge hit. Road haulage (trucks) might be hit particularly hard. Here are the expected changes in a hard Brexit scenario:
1. Road haulage
- Driving licences: The UK will recognise EU licences for a temporary period. The EU, however, will stop accepting UK licences and UK drivers will need an International Driving Permit (IDP).
- ECMT permits: UK hauliers driving in the EU or European Economic Area (EEA) – the EU plus Iceland, Liechtenstein and Norway – might also need a European Conference of Ministers of Transport (ECMT) permit. The ECMT issues only a limited number of permits.
- Driver shortage: Brexit could result in a major driver shortage in the UK. According to Logistics UK, one of Britain’s largest trade associations, one in five van drivers and forklift drivers and one in 10 heavy goods vehicle drivers are EU nationals. Also, a large number of vehicles in the UK are registered in Poland, Ireland and Romania. There are concerns that post-Brexit immigration laws might force many overseas workers, including hauliers, to leave the UK. This could lead to haulage costs going up as well. Shipping major Maersk has already announced an increase in its import haulage tariffs for the UK and Ireland effective January 1.
- Working Time Directive: The EU’s Working Time Directive dictates rules on fair working conditions, such as maximum work hours and breaks. This could drive up logistics costs. For example, waiting out a delay at the border would add to a driver’s working time and make the transit period longer.
- Cost increases: A no-deal Brexit could cost the UK road haulage industry an additional £240 million in tariffs, says Logistics UK. This is because the UK imports 70% of its heavy goods vehicles from the EU. Each vehicle might now incur a 10% tariff of £7,000.
- Delays: Roll-on/Roll-off (RoRo) vessels are a popular shipping choice for traders moving goods between the UK and EU. This is because RoRo ships carry freight trucks, which can be moved straight from the road and on to the ship and vice-versa. But with trucking delays expected, ports might consequently face congestion and shipping delays, which would amount to additional costs for shippers.
- Seafarers’ certificate: The UK will continue to recognise Certificates of Competency issued by the EU for seafarers to work on UK registered ships. However, the EU has indicated it might not do the same with UK-issued Certificates of Competency.
- Cabotage: Maritimecabotage – the transport of goods between ports within the same country by a shipping company from another country – is currently liberalised for EU members but not for third (non-EU) countries. Liberalisation brings with it advantages such as reduced freight costs and higher frequency. With the UK now a third country, it will face cabotage restrictions in EU member states that don’t extend this facility to a third country.
3. Air freight
- Due to the probability of delays at borders and ports, air freight demand is expected to rise as businesses explore alternative ways to transport their goods quickly and conveniently.
- However, a hard Brexit will result in the number of UK-EU flights being capped at 2018 levels, limiting the extent to which businesses can opt for air freight services to avoid trucking delays and port congestion.
- Also, additional customs requirements could cause trucking congestion and related delays at airports and make additional demands on their infrastructure.
How will Brexit impact India?
The UK and EU are important trading partners for India. How will Brexit play out for Indian trade?
India-UK trade ties
In the aftermath of Brexit, Indian businesses can expect two things – a volatile pound sterling and a general slowdown in growth in the UK. In this scenario, here are the possible implications for India-UK trade:
- A weakening pound means imports by Britain will become expensive and import volumes could fall. So, Indian exports to Britain could slow down, especially in the short term. In 2019, Indian exports to the UK stood at $8.8 billion. India-UK trade has grown at an average of 8.8% a year between 2002 and 2018.
- India’s top exports to the UK – apparel, precious metals/stones, machinery and mechanical appliances, vehicles and pharmaceuticals – might be the most affected. The Apparel Export Promotion Council is worried Indian exporters will lose out to their Pakistani and Bangladeshi counterparts, who enjoy preferential trade benefits such as lower tariffs under EU rules. With the UK reportedly keen on retaining these trade benefits, the Council wants the Indian government to take action to ensure Indian exporters get a level-playing field.
- However, there are some who believe Brexit isn’t all bad for India-UK trade ties. While a weak pound might hit Indian exports, businesses that import from the UK might benefit. In 2019, Indian imports from the UK amounted to $6.8 billion.
- India features prominently in the UK’s post-Brexit trade plans. Talks are on for an “enhanced trade partnership”, with the possibility of this turning into an FTA. London is also keen on removing trade barriers across sectors such as food and drink, healthcare, IT, chemicals and services. Additionally, the UK’s GREAT “Ready To Trade” campaign to woo trade partners beyond Europe includes Mumbai among 18 global target cities.
India-EU trade ties
The EU is India’s largest trading partner and the second-largest destination for Indian exports after the US. Goods trade between the two has grown three-fold between 2002 and 2018, from €28 billion to €91 billion. How will Brexit affect this relationship?
- In the context of Brexit, the question being asked is whether India and the EU will revive talks for an FTA they have been negotiating since 2007. Talks had broken down in 2013 over demands for tariff reductions and market access and the inclusion of clauses on social, environmental and human rights. They resumed in 2018 but there hasn’t been much headway. In October, India’s commerce minister Piyush Goyal said New Delhi is keen on an FTA with the EU but the two could probably start with a “preferential trade agreement” for “faster outcomes”.
- Goyal has also said India is keen to engage with the EU (and UK) in sectors such as textiles, handicrafts, leather, furniture and toys at competitive rates.
How to be Brexit-ready
Finally, some tips on how to prepare for the end of the transition period:
- Register for an EORI number and apply for any licences, permits, certificates you might need. Tap your business contacts and local authorities for information on this
- Find out the commodity code (or HS classification, the standard classification system for traded goods) for your product and enter the correct information in your customs declaration. Correct classification means you pay the right amount of duty and know if you are eligible for duty suspension or preferential duty rates
- Fill out your commercial invoice correctly. You’ll need to submit this with your customs declaration
- Check if you need to appoint a customs agent to complete your customs declaration
- Closely monitor news and announcements about new tariffs that could apply on your goods
- Check with your suppliers about what goods and services they procure from the EU, whether they will be increasing their prices to cover Brexit costs, and if they have enough stocks in preparation for border delays
- Brexit will lead to regulatory changes (labelling, testing, approvals, etc). Check what changes for your product
- Speak with your bank about your cashflow needs, which might be affected by higher costs related to new tariffs, customs requirements, stockpiling and storage needs and so on
With days to go, there’s a lot to do to secure your business from Brexit. Try Cogoport for competitive freight and haulage rates and to connect with freight forwarders and customs agents who have the expertise to help you navigate the choppy waters of post-Brexit trade.
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