The figure for UK imports of food and non-alcoholic drinks stands at £35 billion, of which approximately 70% originates from the EU. For this reason the effects of Brexit on the F&B industry can already be seen, most notably through currency shifts which are driving up the price of ingredients, finished goods and packaging imported from abroad. We are also seeing increased pressure on workforces due to the potential restriction of labour movement in the future.
Looking forward, businesses in the sector should be preparing themselves for paying more tax on imports too. Below is an explanation of what will change and what impact it could have on your business.
What will change?
While the outcomes from the Brexit negotiation table are still unknown, in almost all scenarios businesses that currently acquire or despatch goods to the EU will be required to treat these as imports and exports. While this may open up additional opportunities for exporting which go beyond the benefits of a weaker currency, when it comes to imports, both Customs Duty and import VAT are potentially payable.
This matters because Customs Duty, a cost which is not reclaimable, will either need to be absorbed by businesses or passed on to customers. Import VAT, on the other hand, will be payable at point of entry into the UK, and while it can be reclaimed, this could take up to four or more months, tying up important working capital.
The UK currently has access to more than 50 free trade agreements with countries around the world that were negotiated by the EU – entry to these may be lost as a result of Brexit, with a knock-on effect on import and export duties.
There will also be additional administrative costs arising from the need to process import and export declarations and instruct handling agents where necessary. This introduction of customs reporting requirements after Brexit will bring in the region of 180,000 previously unaffected UK traders within the customs net, potentially costing them over £4 billion a year, according to a paper from the Institute of Government.
A very real impact
Let's take an example of a business we have been working with to better understand the impact of these changes.
Working with our client, an importer of approximately £60 million of food and beverage products from the EU each year, we found that the additional Customs Duty cost posed by Brexit could be as much as £10 million per annum. This represented a cost of sales increase of over 15%.
In addition, as import VAT is calculated on the Customs Duty inclusive value of goods imported, we also identified a possible adverse impact on working capital. The business would need to fund the additional import VAT cost until it could be reclaimed from HMRC, a potential cash flow cost of £475k per quarter.
Businesses who don’t buy their ingredients or goods directly from the EU or other markets are not immune. UK wholesalers and suppliers will need to pass on increased costs to someone. Meanwhile, marketing and sales departments will need to prepare early for communicating and reacting to increases in the price of items on the shelf. In other words, the indirect tax impact of Brexit requires a cross-functional approach to assessing and planning for these potential changes. It should be a boardroom issue, if it isn’t already.
To help businesses understand the possible Customs Duty, VAT costs and develop contingency plans, we have developed ‘Brexit Indirect Tax Impact Analysis’ (PDF) [ 294 kb ], a data analytics platform.
Using duty rates and real import and export data, the Brexit Indirect Tax Impact Analysis tool (PDF) [ 294 kb ] assesses the impact of a range of possible scenarios, providing you with a personalised analysis of the potential changes in duty and import VAT. To get started, all we need is your Intrastat and import data (MSS data). Please contact Louise Scholey should you be interested in collaborating with us to create your own dashboards.
Report on unlocking working capital and unclaimed R&D tax relief in food and beverage businesses
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