FD Intelligence

Managing indirect tax risk in global supply chains

We believe that to succeed in a vibrant economy businesses should be mindful, not only of the return generated for shareholders but also their impact on others in our increasingly connected world.

This is never truer than in the context of your business’s supply chain. A cornerstone of profitability, your supply chain may cross many countries and economies, potentially affecting other businesses and the lives of the individuals working for them.

While the prospect of operating in many diverse markets is exciting, it is important that senior management does not lose sight of what is happening locally.

What is an efficient supply chain?

The profitability of a business is directly affected by how its supply chain makes, transports and delivers products, as well as how it is structured to minimise trade and tax expenses. A truly efficient supply chain is one that is able to keep abreast of economic and technical developments, evolving as procurement, manufacturing and distribution strategies change.

More than that, however, an efficient supply chain is one that navigates rapid changes in the international tax environment, reacting quickly at a strategic level to maintain profitability.

Brexit: supply chain implications

The UK’s vote to leave the EU poses a number of risks to supply chain efficiency. While the uncertainty around when Article 50 will be triggered is unhelpful, subsequent changes arising from the exit process will also bring opportunity.

One thing we do know now is that businesses that are registered for VAT in the UK, and all businesses that move goods to or from the EU, will be affected in some way.

The Brexit vote provides a future chancellor with greater opportunity to change the UK's VAT system. For example, the UK will be in a position to: set its own VAT rates; add or remove particular supplies of goods or services to the zero-rate, reduced rate or exemption schedules; and to introduce new 'place of supply' rules to determine what falls within the UK VAT net.

Such changes could have a material impact on VAT cash flow and, if additional VAT costs cannot be passed on to the end consumer, profit margins will be affected.

Perhaps even more critically, business with international supply chains may also face an entirely new Customs regime. Post Brexit, it is more likely that the UK will be outside the customs union of the EU. In that event we will almost certainly see the reintroduction of customs controls at the UK and EU borders.

In the post-Brexit world, businesses will face decisions such as whether to establish hubs within the ‘new EU’ or source goods and services from non-EU trading partners, in order to maintain profitability.

Impact assessments

Preparing for and dealing with an eventual UK Brexit starts now. Affected businesses will be keen to understand what the likely impact of any VAT and customs changes will be on their business models, supply chains and profitability.

If your business is registered for VAT in the UK or involved in cross-border trade with suppliers or customers in other EU member states, we strongly recommend that an impact assessment is undertaken as soon as possible to ensure you have sufficient time to implement strategic and operational changes to your supply chain should the need arise.

Beyond indirect taxes

When reviewing your supply chain, it is also important to consider wider supply chain issues. The tax and legal framework in which businesses operate is changing faster than ever and there are a number of areas that you may wish to consider in the event that you decide to re-organise your supply chain post Brexit:

  • The Organisation for Economic Co-operation and Development (OECD) unveiled its Base Erosion and Profit Shifting Action Plan last year. Our team of specialists can help you consider the impact of the BEPS Action Plan on your supply chain.
  • The UK Bribery Act 2010 prohibits providing hospitality, gifts and facilitation payments to foreign public officials. Does your businesses have sufficient process and controls in place to prevent bribery throughout its supply chain? Find out more here.
  • Preventing slavery and human trafficking is at the forefront of government policy. Is your business caught by the Modern Slavery Act? Check our article for further details.

 Conclusion

Supply chains by their nature form complex webs across the globe and are affected by a wide variety of tax, legal and economic changes. Understanding the potential risks arising and how to respond to these is essential

To find out how we can assist your business, please get in touch with Louise Scholey at louise.scholey@uk.gt.com or call +44 (0)20 7865 2194. Or visit our Indirect tax page for further help and information.