Automotive insights

Preparing for Brexit - the indirect tax action plan

Louise Scholey Louise Scholey

As the automotive industry prepares for the beginning of the Brexit transition period in March next year, we explore the steps that can be taken to minimise disruption and lay the foundations for future growth.

The UK will formally end its membership of the EU on 29 March 2019 and enters a two-year transition period. Just what kind of regulatory environment will emerge after this transition stage concludes in 2020 is uncertain. What is certain, however, is that businesses should be prepared for a post-Brexit future.

An important area of potential change is customs and tariffs. The modern automotive industry has flourished in the customs union and the UK and EU are closely integrated from an economic, regulatory and technical point of view. While it is anticipated that the status quo will be maintained during the transition period, there is the potential for big change afterwards.

Understandably there is a lot of uncertainty and trepidation throughout the industry1 and gloomy pronouncements have framed the narrative so far. The problem with this though is there hasn’t been much discussion of what automotive businesses can actually do to make sure their operations suffer as little disruption as possible.

The key to getting proactive about Brexit is understanding exactly what elements of the modern automotive supply chain are likely to be affected. From here, it is possible to work out some concrete steps that businesses can start taking now.

Frictionless trade and the just-in-time model

Perhaps more than any other industry, automotive has benefited from the free movement of goods and services. The just-in-time production model means that a single component, such as a crankshaft, crosses the channel multiple times and passes through multiple countries before it gets installed into the finished vehicle2. If this supply chain had to pay tariffs or go through customs checks for each movement, billions would be added to the cost of cross-channel business.

This scenario is one that both HMRC and the EU are keen to avoid. There could be delays at borders and the process of moving parts around the supply chain may become more complex (and more paperwork heavy) as a new system is put in place. So it is important that businesses are prepared well ahead of time. This is especially true for smaller companies in the supply chain which may only produce a few parts and have only ever traded within the EU.

Taking a proactive approach

The automotive industry is hugely beneficial to both the UK and the EU. Of the cars exported, 54% from the UK go to the EU, while 67% of the cars registered in the UK in 2017 were imported from the EU. No one wants to see this trade needlessly disrupted, but at the same time businesses cannot sit back.

It is time to be proactive, rather than reactive. Businesses that don’t want to get caught out in a potentially costly and time-intensive way should be thinking about the following.

AEO certification

Every business that could be affected by a change in the tariff regime should consider whether to apply for Authorised Economic Operator (AEO) certification. Internationally recognised as a mark of quality, AEO shows that a company’s customs controls and procedures are efficient and compliant3.

AEO certification provides a whole host of benefits, especially for automotive companies looking to minimise post-Brexit disruption. In particular, companies face fewer physical and document-based controls, get prior notification in case of physical control and priority treatment. There are also fewer requirements to put in place costly guarantees to obtain certain customs reliefs. In short, AEO certified businesses are recognised as a secure and safe business partner by European and other customs authorities. 

HMRC has committed to setting up its own regime to match AEO for which it will seek mutual recognition with the EU (and other countries), so applying today is an easy win for automotive companies. The application process currently takes around nine to 12 months, so there is more than enough time to initiate the process before the UK formally leaves the EU and the transition period comes to an end.

Customs reliefs

There are also customs reliefs that companies can apply for now in order to start gaining benefits. These reliefs are designed to allow companies to pay less or no duty on imports and exports from and to non-EU countries. Two that might be of particular interest to the automotive industry are inward processing and customs warehousing.

Inward and outward processing allows companies to get relief from customs duty and import VAT on goods that are imported from outside the EU but then processed in the UK before being exported again4 and vice versa. The relief is available for everything from repacking or sorting goods to complex manufacturing processes.

Customs warehousing could also prove useful if companies need to start storing more parts and components during the manufacturing process. The relief allows traders to store goods with duty or import VAT delayed5. Goods can be placed in a customs warehouse even if the final destination of the goods is not known at the time they are imported.

Each of these reliefs can be applied for now, so that the benefits can be applied to non-EU trade, with a view to extending the relief to EU consignments once the final Brexit outcome becomes clearer.

Making your voice heard

HMRC has repeatedly said that it wants as much input from businesses as possible when it comes to shaping both its negotiation position and post-Brexit aims. This is not the time for the automotive industry to sit back and wait. It is a time for making its voice heard. Lobbying the government, either directly or through trade bodies and sharing thoughts with professional advisors who meet regularly with HMRC’s various committees is an important part of the process. It will define what kind of customs framework emerges after 2020.

While the ongoing media narrative surrounding Brexit might be one of a slowly unfolding catastrophe, it is clear that no one involved wants to disrupt huge, mutually beneficial industries such as automotive. Businesses do have a role to play in making sure that the UK’s transition out of the EU is as smooth as possible. By taking positive steps today to prepare, businesses can be a positive force for change within the entire supply chain.

To discuss how we can support your business prepare for brexit, please get in touch with Louise Scholey

References

  1. Parliament. 2018. The impact of Brexit on the automotive sector
  2. The Guardian. 2018. A Mini part's incredible journey shows how Brexit will hit the UK car industry
  3. European Commission. 2018. Authorised Economic Operator (AEO)
  4. GOV.UK. 2018. Inward Processing
  5. GOV.UK. 2018. Customs Warehousing