With the UK’s upcoming exit from the European Union finally confirmed following the Christmas general election, John Leyden FCA, CEO and Founder of Carbon Accountancy, discusses how trade suppliers can prepare for the UK’s exit from the single market…
2019 was undoubtedly a difficult year for UK retailers. Whilst more generous economic analysts may describe the year as ‘challenging’, let’s be under no illusions – we ended a decade of high street fragility with a particularly tough year. According to The Centre for Retail Research, 300 stores closed their doors every week with 2,700 jobs lost with them. We lost no less than 37 high street staples, affecting almost 43,000 employees – Jack Wills, Mothercare, Clintons and Bathstore to name but a few. And within days of ringing in the new decade, Debenhams announced its resolution to their ailing fortunes by revealing the 19 locations that will permanently shut up shop in the coming weeks. 2020 could have started on a cheerier note for retailers.
The crisis on our high street shows no sign of subsiding, as online shopping continues to evolve and provide better experiences for consumers and preferred business rates and overheads for retailers. Other problems, however, have been caused by the ever-looming uncertainty of Brexit. Unfavourable foreign exchange rates have pushed up prices for retailers and consumers alike, whilst the latter’s confidence has sunk to new lows.
The Conservative re-election over the Christmas period has, at the very least, removed one level of uncertainty. Like it or not, the UK will be leaving the European Union. But with it will come further bumps in the road for UK retailers, particularly following the end of the transition period and our exit from the single market. It all relates to the cash impact of VAT imports – and it could be the final nail in the coffin for many more retailers if they aren’t prepared for the changes afoot.
What changes are coming?
As a single market, retailers do not have to pay tax on imports from the EU. This will all change following the end of the transition period on 31st December 2020. At this point, goods will come through a custom border with import duties and VAT payable at the point of entry. This will apply to the majority of goods coming into the UK from EU suppliers. Foodstuffs are one of few exceptions to this rule so major food retailers will be largely spared from these changes.
What could this mean for consumers and retailers?
Consumers will feel the brunt of the cost of import duties, as retail prices will increase to cover these additional costs. And whilst retailers can reclaim the VAT of goods imported from the EU from HMRC in the quarterly VAT return, it is the payment at the point of entry that presents the real problem.
Within the single market, not only are goods imported from the EU exempt from VAT but retailers purchase goods with a significant credit period, which can be up to 150 days for larger retailers. Such a credit period allows retailers to begin selling goods to the end consumer before payment to their suppliers, maximising their cash flow – all-important in the current retail climate. If retailers are required to pay VAT on entry, it could have a significant impact on their business.
For example, a retailer purchasing £100 million in imported goods each year will now need to pay a total of £20 million in tax on these purchases. And with the tax on imported goods payable on day one and, in many cases, unable to be reclaimed for four months – the retailer would lose £6.6 million in ready cash within the first four months of Brexit.
Could this spell the end for more high street retailers? Possibly not. Retailers may already have a solution – and their salvation may come at the expense of their suppliers.
What could be the impact on EU-based trade suppliers?
Word on the street is that large retailers plan on passing the VAT payments on to the trade suppliers themselves, sparing themselves the initial cash hit. It’s an unsurprising outcome considering retailers like – or rather need – to hold on to their cash.
But is it realistic to expect EU-based trade suppliers to be able to take the hit? They too will need to reclaim VAT within the UK, which will require a UK-based branch for them to import their own goods to before selling on to retailers. Whilst such a global infrastructure is likely to already be in place for large companies, it could spell trouble for smaller or medium-sized suppliers. It is these suppliers who may need to prepare for the future.
How could smaller and medium-sized EU-based trade suppliers get around this?
If UK retailers plan on passing the VAT cost onto their EU suppliers, those without a UK presence face a difficult decision. Their first option is to work with a distributor – a separate UK based company who will facilitate the purchase and sale of their goods. Whilst this may be a good temporary solution, it adds a layer of complexity to trade and suppliers lose a significant profit margin. It’s unviable in the long-term.
As the all-too-familiar phrase goes, ‘Brexit means Brexit’. There is no going back. Biting the bullet and building a UK presence is by far the most sustainable and simplest option. Luckily, the UK is an easy place to do business.
One saving grace which could soften the blow of Brexit for both retailers and suppliers is the prospect of a trade deal. With no clear visibility currently on what this could look like, we can be certain that it will be a world away from the ease of trade we experience with our European neighbours at the moment. And, of course, that’s assuming a deal can be reached. ‘No deal’ remains a very real prospect, and one our government doesn’t seem too shy of.
What’s clear is that either retailers or suppliers will bear the brunt of the pain once we leave the single market. Just who that will be – we’ll have to wait and see. In the meantime, it wouldn’t do any harm to either to formulate a contingency plan.
About the Author
John Leyden FCA was shortlisted for the Finance Director of the Year Awards 2012 by the ICAEW. He spent 7 years at KPMG before starting Carbon Accountancy, which prides itself on outstanding client service and meeting client needs through trust and dedication. John specialises in business advice, audits, tax planning, corporate finance, due diligence and share option schemes.
The firm was shortlisted in Accountancy Age’s British Accountancy Awards 2012 as Independent Firm of The Year, Greater London and was named as one of the “runners and riders” – one to watch – in Accountancy Age Top 50 + 50 firms in the UK.