What could a no-deal Brexit mean for retail?

A no-deal Brexit could now just be weeks away from becoming a reality for retailers, as the clock ticks towards the 29 March 2019 when the UK will officially leave the European Union (EU).

Retailers are facing a race against time in preparing themselves for this eventuality, if no agreement is brokered with the EU.

In technological and business terms, a no deal outcome will create some of the biggest changes the industry has faced since the EU single market was developed.

Tech issues

The British Retail Consortium (BRC) has been clear in its opposition to a no deal, and favours a solution to allow current trading conditions to continue.

William Bain, the BRC’s Europe and international policy adviser, explains: “Companies have been used to dealing with the single market and the customs union, and common VAT arrangements for three decades. No deal is a massive change.”

“Specifically in terms of the technology issues in terms of customs and transit, the UK government is not anticipating having physical checks at the borders, and will seek to administer pre-lodged and scanned declarations for imports prior to travel to the UK.”

Lengthy delays for hauliers and ferry companies are widely expected, as declarations of products to be imported and exported will rapidly escalate.

The UK government has said that infrastructural changes in the event of a no-deal Brexit will include a digital VAT system, for goods being brought into the UK from the EU that climb over the value of £135. But there has been no details as yet on how this system would interact with the HMRC and company databases.

There has also been concern expressed by the Public Accounts Committee in Parliament over the HMRC’s Custom Declaration Service, which only currently has functionality for imported but not exported goods.

No deal set to increase costs

Retail Economics produced a study as part of its quarterly Brexit trade review released in November last year, over the impact on expenses for retailers for a hard Brexit.

“Overall food inflation could reach 6.5% - three quarters of what we import is from the EU.”Richard Lim, chief executive of Retail Economics

The research consultancy found that if the EU’s most favoured nation tariff rates are applied, then the increase in costs will reach £7.8 billion per year based on 2017 trade flows.

Food and drink duties would bear the brunt of these costs, accounting for £6 billion of the tariff charges.

Richard Lim, chief executive of Retail Economics, says: “From a business point of view, the clear challenge on costs for retailers is how will they cope with passing on these costs to consumers, in a fiercely competitive retail market?”

“Overall food inflation could reach 6.5% - three quarters of what we import is from the EU.”

To mitigate the impact of a no-deal outcome, Retail Economics has been working closely with retailers. It found over a third of retailers said they had done little or no preparation for a hard Brexit and almost a third expected increased costs.

More positively, 73% of respondents confirmed they had conducted some research into the effect of additional duties under a World Trade Organisation (WTO) framework.

“I would say that most of the large grocery retailers have adopted quite a sophisticated and forensic approach to the potential disruption.” Lim adds.

“But there are thousands of small independent food retailers, I would argue, have not made the required preparations for the additional costs to their businesses.”

Retailers react to no deal

However, Next has broken the mould in the retail industry by producing a detailed plan in how it would prepare for a no deal, identifying a series of direct and indirect risks.

The direct risks include an import duties increase, which it believes is alleviated due to the Generalised System of Preferences, a favourable tariff system with developing nations Next imports from, with exemptions from WTO rules.

A little over a third of its stock arrives from China, and a no-deal Brexit would not impact tariff costs from the Far East.

The clothing retailer does not believe there will be additional data to import goods from the EU, as it already supplies Intrastat declarations that any company has to do if it imports more than £1.5 million of goods, and exports over £250,000 per year.

An increase in declarations though is anticipated overall, with a hike in administrative costs estimated to be around £100,000.

In the meantime computer systems are being updated for any potential workload increases.

While GlaxoSmithKline has also evaluated Brexit, as the pharmaceutical industry is thought to be concerned about leaving the EU, as a heavily regulated sector.

Since January last year a contingency plan has been in place, with a focus on supply chains.

Re-testing of medicines and certification of medicines, have been increasingly conducted across the UK and EU. Marketing authorisations have been transferred from the UK to an EU entity, packaging will also be updated, and whole import licences are to be amended alongside and increase in warehousing capacity.

Overall the cost of these changes are expected to reach £70 million over the course of the next two or three years.

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